refinance

When is a HARP refinance worth the cost?

Highlights
  • HARP refinances don't always reduce monthly payments substantially.
  • The bigger the mortgage, the larger the potential savings every month.
  • Upfront costs are big for those with bad credit and negative equity.

Lured by the opportunity to reduce their mortgage payments, many homeowners embark in the often-frustrating experience of trying to refinance through HARP -- the Home Affordable Refinance Program.

The federal program, designed to ease refinancing for homeowners who are underwater or have little equity on their homes, may sound like a good opportunity on the surface. But is it worth the time, hassle and money you will need to spend on closing costs?

Borrowers who refinanced through HARP in the first half of 2010 saved an average of $125 to $150 a month on their monthly mortgage payments, according to Freddie Mac.

That's not much, considering some of these borrowers spent thousands on closing costs.

"Borrowers get attracted to refis like moths to a flame," says Ed Conarchy, an investment adviser and a banker at Cherry Creek Mortgage Co. in Vernon Hills, Ill. "They are attracted to that low rate, but sometimes they don't see that's only half of the story. You have to factor in the closing costs."

Closing costs vs. savings

Those with larger loans who got mortgages when rates were in the 6 percent to 8 percent range are more likely to benefit from HARP refinances than homeowners in less-expensive areas.

For instance, a borrower who refinances a $125,000 loan that originally had a 6.5 percent interest rate will save $90.13 a month in mortgage payments with a refinanced loan carrying a 5.375 percent interest rate, according to Jim Sahnger, a mortgage consultant for FBC Mortgage, in Jupiter, Fla. But that borrower would have to spend about $3,230 in closing costs, meaning it would take the borrower almost three years to recoup that money.

 

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On the other hand, a borrower who owes $375,000 under the same scenario would save $270.37 a month. With estimated closing costs of $3,915, the borrower would recoup that expense in a little more than a year. On a loan this size, it would make sense to consider it, Sahnger says.

Conarchy says he has helped several borrowers who have refinanced through HARP. But in most of the cases, refinancing only made sense because the borrowers didn't have to pay lender fees -- and in Illinois, title costs are generally less expensive than in other states, he says.

"If your closing costs are $600 and you're saving 100 bucks a month, that's a slam-dunk," he says. "In six months you'll break even."

Ways to reduce upfront costs

The chances you'll pay only $600 for closing costs are low, especially in states where title fees are more expensive. Finding a lender willing to offer a HARP refinance with no fees isn't easy, and most of the time the lender will compensate the waived upfront fee by charging a slightly higher interest rate. They may also add your closing costs to the total balance of your refinanced loan, which is permitted in HARP. But that may affect your eligibility for the program, as it influences the loan-to-value ratio of your mortgage.

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