Refi Out of an Egregious Mortgage?

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.

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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.

Who Qualifies

To qualify for HARP, Fannie or Freddie must have owned your existing mortgage on or before May 31, 2009. (To check your mortgage, go to Fannie Mae's Loan Lookup Tool or call 800-732-6643. Also, try visiting Freddie Mac's Mortgage Search Tool or call 800-373-3343 from 8 a.m. to 8 p.m. EST.) Your loan must have an LTV of at least 80%, and you must be current on your mortgage payments with no late payment for the past six months and no more than one late payment in the past 12 months.

You'll still have to meet tight qualifying criteria, and it will be even tougher if your LTV exceeds 125%. "HARP won't help the third of borrowers out there who got loans during the go-go years that wouldn't qualify under standards now," says Cecala. Plus, you can't fold a home-equity loan (which may carry a higher interest rate) into a single, cheaper loan with an LTV of more than 125%, and even if you meet that standard, the second lender must agree to resubordinate -- that is, stand second in line if you ultimately default. If you've already refinanced once with HARP, you can't do it again.

Contact your existing lender or visit www.freddiemac.com (search for "Home Affordable Refinance Lenders") to find a participating lender. To investigate other mortgage-relief options, call 888-995-4673 to speak with a HUD-approved housing counselor.

Esswein joined Kiplinger in May 1984 as director of special publications and managing editor of Kiplinger Books. In 2004, she began covering real estate for Kiplinger's Personal Finance, writing about the housing market, buying and selling a home, getting a mortgage, and home improvement. Prior to joining Kiplinger, Esswein wrote and edited for Empire Sports, a monthly magazine covering sports and recreation in upstate New York. She holds a BA degree from Gustavus Adolphus College, in St. Peter, Minn., and an MA in magazine journalism from the S.I. Newhouse School at Syracuse University.