Remember the old adage "There is no such thing as a free lunch?" A friend from Mat-Su contacted us recently after she received a call from a local lender offering a refinance deal. The lender suggested refinancing her home to a lower interest rate at no cost. She asked us, "How can they do this?"
It turns out several programs can do this, including the Home Affordability Refinance Program, also called HARP, and FHA/VA Streamline. Here are answers to the questions we posed.
How can there be no closing costs?
The lender charges a slightly higher interest rate so it can absorb the upfront closing cost. The higher rate averages a half percentage point, depending on the loan amount. If you pay the closing costs instead, on average you have to stay in your home at least four to five years to come out ahead.
Will credit scores affect the interest rate?
FHA/VA Streamline programs do not have interest-rate adjustments (stepped increases) if your credit score is between 620 and 850.
However, HARP loans do have interest-rate adjusters, which start at credit scores below 740. The lower your score the higher your rate. If your credit score is below 680, the adjusters might take the interest rate too high to justify refinancing with HARP.
How is the value of a home determined?
Typically with a computer-generated model, which uses recent sales that they may have access to and tax estimates for quick valuation without a full appraisal. If not enough data is available for the quick valuation, a full appraisal would be needed.
If the value comes in less than your first mortgage, HARP allows some flexibility as long as your mortgage does not exceed 125 percent of the current market value.
Do you have to pay private mortgage insurance again?
It depends. If your current loan does not have PMI, you won't be charged it on a HARP refinance, even if your new loan-to-value ratio is over 80 percent.
Can you drop a spouse from the new loan?
If you ended up with the house from a divorce or death, and you have made payments on your own for the last 12 months, you can still take advantage of refinancing -- and drop the spouse -- but you have to qualify on your own.
Are there any reasons not to refinance? Any risks?
The goal of HARP is to improve affordability and stability of your mortgage. There are no balloon payments or prepayment penalties to worry about. So if you can make your new mortgage payment, the only reason not to refinance is if the refinance doesn't reduce your payment.
Most people refinance to decrease their monthly mortgage payment or pay it off quicker. For example, if you have been paying for three years on a 30-year loan, you have a 27-year balance. When you refinance, even at the same interest rate, you spread the balance out to 30 years again, creating a lower monthly payment. When combined with interest rates still close to 40-year lows, this reduced mortgage payment can be very appealing.
If your goal is to pay it off quicker, you can do that in two ways. First, if you can afford your previous higher payment after the refinance, consider continuing to make it. By applying the extra amount to the principal balance, the loan will pay off sooner. You still will have a safety net of making only the regular payment, without the extra, if the need ever arises. Second, if you have been paying for seven years or more, consider a 15- or 20-year loan rather than one amortized over 30 years.
With either option, as long as you feel comfortable making the larger payment, refinancing could make sense.
How about a duplex or investment property?
Income properties have substantial interest-rate adjusters, so you need to take that into account.
Anything else you should know?
No documentation or income verification is needed. You must be current on existing mortgage payments. You cannot use this refinance to extract equity to pay off other debts. The HARP program will expire June 10. We hope you will be able to take maximum advantage of the savings before interest rates rise again.
Clair and Barbara Ramsey are local associate brokers specializing in residential real estate. Their column appears monthly. Their e-mail address is email@example.com.
Barbara and Clair Ramsey