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Can I Afford the HARP Refinance on my Super Underwater Mortgage?

For the past two days, I’ve been talking about my primary-residence-turned-rental property that is super underwater, and also programs that are available to help people in my same situation. Today, I’ll talk the specifics of my costs involving the refinancing for my underwater rental property.

The Obama Administration’s Home Affordable Refinance Program has been around for about three years. But, it wasn’t until November 2011 that the guidelines were adjusted to what they currently are. Specifically, the guidelines just changed to expand the program to all mortgages owned by Fannie Mae or Freddie Mac regardless of how much the home is underwater. Before, the program capped the loan-to-value (LTV) at 125%. Now, there is no cap. Also, the language of the program before specifically stated that the refinance had to be with a primary residence. Now, that language is gone.

In other words, I recently found out that under the new guidelines my primary-residence-forced-into-investment-property was possibly eligible for a refinance, even though it is rented AND underwater on its mortgage by more than $35,000.

To be clear, although HARP exist, it is up to each institution to implement HARP guidelines. And, the institutions are not exempt from adding their own eligibility requirements.

So, when I heard the news  I was super excited to have the opportunity to refinance my super underwater mortgage.

MY UNDERWATER MORTGAGE SPECIFICS

My mortgage is currently 5 years into a 30 year fixed rate 6.5% term. The current mortgage payment is $1,493, including taxes and insurance. The current rental income is $1,100. Therefore, I have a net “loss” of $393 monthly for a house that I’ll never live in. This is why for the last 2 years, at least, my mortgage has been pissing me off.

If I refinance under HARP, I’d be able to reduce my mortgage payments to $1,170 if I choose another 30 year mortgage. In this case, I’d only have a net “loss” of $70 monthly while riding out the next 5-8 years of this real estate debacle. Or, if I choose a 15 year mortgage, I’d at least start building equity and have the home paid off in 15 years, versus the 25 years remaining, although my payments will stay roughly the same, yielding me the same current net “loss” of $393. Either way, good will come from a refinance of my super underwater mortgage.

This being stated, the lending institution that services my mortgage is allowing me to refinance under HARP as long as I meet their eligibility guidelines.

MY LENDING INSTITUTION’S GUIDELINES

In addition to the eligibility guidelines of HARP, my lending institution requires that I:

  • Have a credit score of at least 700
  • Have enough liquid assets to cover closing costs
  • Have enough liquid assets to cover 6 months worth of payments for each mortgage that I have.

The closing costs are pretty steep, although up to $5,000 can be “rolled” into the new loan. For a refinance with no origination charge and a rate of 4.625% for a 30 year, or 4.125% for a 15 year mortgage, the points are 2.25% of the mortgage. So, a refinance of $177,000 will cost $3,982.50 in points alone. Adding settlement, appraisal, and other fees, the closing cost will end up around $9,000.

I have two mortgages, including the subject property. My current mortgage has a payment of roughly $670.00. So, to cover 6 months worth of payments for each mortgage, I need to have as liquid, $4020 + $7200 (assuming an after refinance mortgage payment of $1200) = $11,220.

In summary, I’d have to prove that I have $20,000 in liquid savings (in which $4,000 will be used to pay closing costs, outside of the $5,000 that can be “rolled” into the new mortgage) before an ultimate approval for HARP. Go figure. With these guidelines, it is no wonder why there are still many people ineligible to take advantage of HARP 2.0. If people don’t have sufficient cash, they can’t proceed, and therefore still find themselves in a tough situation. This is why I argue that Debt is Often Bad, But Cash is Always King!

Comment Below to Share:

  • What do you think of these guidelines?
  • What guidelines did your lending institution have if you’ve already done a HARP refinance for a rental property?

Comments

  1. Congratulations! You did a good job of controlling your cash-flow and building a cash reserve to be able to re-negotiate this debt. Cash provided flexibility, particularly in this case.

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