In this series, I detail six possible ways to deal with an “underwater” home—one that’s worth less than the amount of money owed on it. Here is the second part of my six-part series.
Option #2: Refinance
Homeowners who are underwater may be able to refinance into a low, fixed-rate loan under the Home Affordable Refinance Program (HARP). The program, which was slated to expire this summer, has been extended through June 2012. For those who qualify, the terms are similar to those of any other conventional loan, but without the steep mortgage insurance that is typically required when there is less than 20% equity in the home.
“We’re still seeing a steady demand for these loans from homeowners whose equity has dried up,” says Joe Kelly, president of YouCanRefi.com, which specializes in HARP loans. “With rates so low right now, some homeowners can cut their monthly payments significantly,” he notes, “and that may allow them to keep their homes.”
HARP is available for loans owned by Fannie Mae or Freddie Mac. To refinance under HARP you don’t need to work with your current lender, but it is helpful to work with a mortgage lender that has expertise in the nuances of the program, advises Kelly. Find out if you qualify at YouCanRefi.com.
If your mortgage loan is a “portfolio” loan still owned by your lender, you won’t be able to refinance under HARP, but you may able to work with your lender directly. That’s what the Kendall family did. (Their name has been changed.) They purchased their home for $329,000 and it was worth about $181,000 when they approached their credit union to lower the 6.25% interest rate. A loan officer at the credit union told Ben he might be able to refinance under HARP, but he wasn’t eligible because his loan wasn’t owned by Fannie. “I told them to sell my loan, but they wouldn’t because I was paying and it was a good loan,” he muses.
But Ben Kendall wouldn’t take no for an answer. An email to the president of the credit union snagged the couple a 15-year loan at 4.5%. “Within a few weeks we had tripled the amount of principal we were paying, making the most of a bad situation,” he says.
Of course, it took a little arm-twisting to get there. Kendall made it clear there was no hardship, but also told the credit union they would stop paying if they couldn’t strike a deal. “Underwater homeowners need to act stupid to be smart financially these days,” he says.
According to the HUD June 2011 Housing Scorecard, some 10.6 million homeowners have refinanced since April 2009, though most of those homes were not likely upside down.
If you are able to refinance, there should be no damage to your credit rating. You’re just paying off one loan and getting a new one. But, like staying and paying, you may still be at risk of losing your home if your income drops and you can’t keep up with your payments. And if you need to sell for some reason (job relocation or divorce, for example) you may find yourself forced to consider more drastic options.