Mortgage interest rates are lower than they’ve been in years. As a result, many homeowners want to refinance their mortgages to reduce their monthly payments and take cash out. As a result, you might be wondering if there’s any way you qualify for refinancing—even if you have little or no equity.
Negative Equity and Loan-to-Value Ratio
There are many benefits to refinancing, including: lowering your monthly payment, reducing your interest rate, securing a fixed-rate mortgage if you currently have an adjustable mortgage, and gaining the ability to build equity faster.
Typically, lenders require a loan-to-value ratio of 80 percent. That means the ratio of the home value to the amount owed on the loan is 80 percent. If your home is appraised at $200,000 loan and you’ve made $40,000 worth of payments, that’s 80 percent. You have 20 percent equity in the home.
However, some homeowners find themselves in the unfortunate position of owing more than their home is worth. This is referred to as underwater or negative equity. That said, there is a refinancing option if you have negative equity.
Under the Federal Home Affordable Refinance Program, borrowers with little or no equity can slide into more affordable mortgages without new or additional mortgage insurance. HARP targets borrowers with loan-to-value (LTV) ratios equal to or greater than 80 percent. HARP targets those who have limited delinquencies over the 12 months prior to refinancing. The program is set to expire Dec. 31, 2016.
There are several key points to the program, including:
- Qualified borrowers can be underwater in their loans; it doesn’t matter how far under they are.
- The process is quicker because appraisals and underwriting isn’t required.
- Fees are lower than standard refinance loans.
- Less paperwork is required.
Qualifying and Applying for HARP
In order to qualify, your loan has to be owned by Freddie Mac or Fannie Mae. You have to be current on your mortgage payments with no late payments more than 30 days. In addition, your original loan needs to have originated before May 31, 2009.
If you choose to apply for a HARP refinance, the first thing you should do is gather your mortgage and income information. Next, you’ll want to find a mortgage company that is an approved HARP lender. Your lender will then let you know whether you qualify for a HARP loan.