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# Refi Out of an Egregious Mortgage?

The Home Affordable Refinance Program (HARP) targeting homeowners with underwater mortgages may be able to provide some relief.

With the recent relaunch of the Home Affordable Refinance Program (HARP), more homeowners who are underwater on their mortgage -- who owe more on their loan than their home is worth -- qualify to trade in their mortgage for a lower-interest version.

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The goal of the program -- dubbed HARP 2.0 -- is for many more underwater homeowners to refinance to a lower rate and payment, or a shorter term, so they can rebuild equity more quickly. The new rules eliminate the 125% ceiling on the loan-to-value, or LTV, ratio (the amount of your mortgage divided by the market value of your home) for fixed-rate loans owned by Fannie Mae and Freddie Mac. The rules also eliminate the need for a new appraisal when a reliable automated valuation can be provided by Fannie or Freddie. Borrowers can begin applying under the new rules on December 1, 2011, and the program expires on December 31, 2013.

Consider this example of how refinancing to a lower rate and shorter term can help you get your head above water faster: Say you have a \$200,000 mortgage on a house that's now worth \$160,000 (an LTV of 125%) and an interest rate of 6.5%. If you refi into a 30-year fixed rate of 4.5%, the monthly payment would fall by \$251, but your loan balance wouldn't reach \$160,000 for ten years. Refi into a 20-year loan term with a rate of 4.25% and you'd cut just \$26 from your monthly payment, but your balance would reach \$160,000 in five-and-a-half years.

Will Lenders Play Ball?

"The million-dollar question is: Will lenders embrace the program?" says Guy Cecala, publisher of Inside Mortgage Finance, an industry publication. Even when the upper limit was 125%, lenders imposed their own limit of 105% on most of the HARP refis they did out of fear that Fannie or Freddie might demand that they take back the loans and carry them on their books.

In theory, the new rules of HARP 2.0 should help, he says. But even if lenders are willing, their automated underwriting systems won't be updated and ready to go until March 2012. They can qualify borrowers manually before then, but that's more labor intensive and requires tougher underwriting, says Cecala.

Even though Fannie and Freddie won't add a risk premium to the interest rate, lenders are likely to charge slightly more -- maybe a quarter of a percentage point -- because HARP loans with an LTV greater than 105% will fall into a pool of mortgage-backed securities that won't be as liquid as the best, plain-vanilla ones.