Why Refinance Your First Mortgage Now, and What is HARP?

Thanks to historically low interest rates, it’s never been easier to save money on your mortgage. Nick Sisto, from STC Capital Bank, offers advice for homeowners looking to take advantage of these unusual times.

One of the biggest reasons homeowners refinance their mortgage is to obtain a lower interest rate and lower monthly payments. Interest rates are currently at historic lows, so now is an excellent time to consider this option.

By refinancing, the borrowers pay off their existing mortgage and replaces it with a new one. This can often be accomplished with a no-points, no-fees loan program, which essentially means at no “cost” to the borrower.

In the no-points, no-fees scenario, the mortgage consultant uses rebate monies paid by the lender to pay off non-recurring closing costs for the borrower. These are “one-time” fees, such as title insurance, document preparation, tax service, flood certification, processing and underwriting fees. The borrower is still responsible for recurring fees such as interim insurance, property taxes or insurance policy payments.

Refinancing typically occurs when mortgage interest rates drop significantly, but borrowers with recently improved credit scores (from paying off credit card debt, making mortgage payments on time, etc.) are often candidates for better interest rates as well. If you haven’t checked your credit score in awhile, it’s a good time to call a mortgage consultant.

Many homeowners don’t believe that they can refinance their current mortgage, because the value of their home may have declined in these recent economic times. To address this problem, the Home Affordable Refinance Program (HARP) was instituted by the U.S. Treasury and the Department of Housing and Urban Development.

Under the HARP program, many homeowners are able to refinance, even if their homes are “under water.” In addition, appraisals may be eliminated and underwriting relaxed. The most recent changes became effective on March 19, 2012.

It’s important to note that the HARP program is for loans that were secured by Fannie Mae and Freddie Mac prior to June 1, 2009. Individuals can determine if their loans are eligible by checking the following websites:

Regardless of which type of refinance program works for a borrower, the question most asked is, “Should I refinance into a 30-year loan?”

There are different schools of thought on this subject, and the mortgage consultant should work hand-in-hand with the borrower’s financial planner to determine what works best for their mutual client.

One option is to take the route of the “same payment” refinance, actually paying off the loan faster and saving money on interest in the long run. If refinancing results in a lower monthly payment, the borrowers can still continue making the same payments they made in the original loan, and the extra money will be applied to the principal balance.

For example: Let’s say you have 25 years remaining in your current loan, and you refinance to a 30-year loan with a slightly lower interest rate, resulting in a payment reduction of $200 per month. (Note: This is just an example. The actual amount could vary.) You could then take that extra $200 per month and apply it toward the principal on the new loan. At this rate, the loan will be paid off in 22 years and four months, which is two years and eight months sooner than the original loan.

Another option would be to use the extra savings to pay off higher-interest-rate borrowing, such as credit card debt.
A knowledgeable loan consultant can assist homeowners in understanding their refinancing options and also provide alternatives for their new loan. ❚

Nick Sisto is affiliated with STC Capital Bank, St. Charles, an FDIC insured bank. For free consultation and a copy of The Certified Guide to Credit Scoring, call Nick Sisto at (630) 448-0342.