As consumers know, the Making Homes Affordable Program aka Harp 2 Refinance allows people to refinance so long as the loan is owned by Fannie Mae or Freddie Mac, with out any loan-to-value restriction. Consumers  could also successfully refinance any occupancy home type under the program.

While this program, is helping many homeowners take advantage of today’s low rates, the pendulum has swung the opposite direction for homeowners whose loans are not owned by Fannie Mae or Freddie Mac.

First, determine eligibility to for Harp 2

1. Look up your mortgage on Fannie Mae’s Loan Lookup Tool or Freddie Mac’s Loan Lookup Tool  if either entity owns your loan, and your loan was taken out June 1, 2009 or before, you are likely eligible

2. Check out Zillow’s Home Valuation  for other homes in and around your area that have recently closed

3. Contact a local real estate professional about your home’s value, many will give you an honest answer in hopes to secure listing down the road, if a fit, consider them as a resource for later on.

4. Contact a mortgage lender to get qualified. This means allowing them to review your credit, debt, income, and assets, in an effort to give you additional options.

5. Allow mortgage lender to order an appraisal to determine the loan to value (*home prices are up in most markets, so ordering an appraisal provides a good chance of being able to successfully procure a refinance)

*Important Mortgage Tip: Prior to ordering appraisal, do make sure your lender can fully qualify you. Average cost of an appraisal is approximately $450.

Do the numbers make sense to refinance?

Lending Requirements to be mindful before getting started:

  • If less than 20% equity, monthly mortgage insurance will be required
  • Ability to refinance will be limited to 97% loan to value financing on conforming loans where $417,000 is the benchmark conforming loan limit (most states) or 85% loan to value on conforming high balance loan limit
  • If loan amount is on the larger side (bigger than $417,000), an FHA Loan will go to 97%  loan to value (FHA also ensures bigger loan amounts beyond  the Conforming High Balance Limits (again varying from county to county in each state)  Example: Sonoma County, CA the FHA will ensure up to $662,500 at 97% loan to value compared to the limit of $520,950 in the county in Sonoma

*To refinance- the loan to value will have to be adjusted to fit within the guidelines for the loan program/product being sought, something to go over with your loan officer

Typical scenario

Appraised Value $300,000

Loan amount to be refinanced $315,000

Interest rate on current loan 4.625%

Closing costs on new loan $2700

Final pay off on current loan $317,200

New rate 3.5% on new 30 year fixed rate

Monthly savings potential $425 per month

Max new loan amount at max 97% loan to value $291,000

Cash needed to close $28,900

In such a scenario, most would opt to not do the transaction, due to the cash infusion. However, there’s another more beneficial way to look at this. A better question for any homeowner considering refinancing using a cash “what kind of return am I receiving on my $28,900 in the bank?”

Perhaps .90% APY?

Consider this,  if it takes giving up $28,900 in order to gain a savings $425 per month, that is a 17.6% cash on cash return on investment.

Here’s the math: ($425 savings ×12 months) ÷ into $28,900 of capital required for the investment= 17.6% return

General Rules For Paying Down Your Principal Balance otherwise known as Cash In Refinance

  • If annual return is greater than the rate you are earning on those dollars, refinancing makes sense
  • Breaking even within 12 to 24 months? As determined by: dividing costs of getting mortgage into monthly savings generated
  • If the cash already invested elsewhere is lower than the cash on cash return you’ll gain by refinancing, refinancing still makes sense