NEW YORK (
) -- Today's amazingly low mortgage refinancing rates and the Federal Housing Finance Agency's (FHFA) expanded refinancing program give millions of "underwater" borrowers a chance to lock in an excellent deal.
President Obama and the FHFA -- which regulates
, which were placed under government conservatorship in September 2008 and together hold roughly half of all U.S. mortgage loans -- late last month announced an expansion of its Home Affordable Refinance Program, or HARP, so that beginning in early 2012, a borrower could refinance their entire mortgage loan balance, even if the home has declined so much in value that the loan-to-value ratio (LTV) would be above the current limit of 125%.
This means that you could easily cut your monthly outlay for mortgage principal and interest in half, without ponying up extra cash in order to make up for the lost value of the home and bring the LTV down to 125% or even the traditional 80% level.
When announcing the expansion of HARP, the FHFA said that additional details to participating mortgage lenders and servicers would be made available by Nov. 15. This means you should call your loan servicer tomorrow to discuss refinancing possibilities.
The FHFA's expanded HARP program also provides an incentive to refinance to a shorter-term, say a 15-year fixed-rate loan, which would also feature a much lower interest rate.
Of course, as you face the daily onslaught of sales pitches, media reports and financial advice, you're unlikely to hear too many voices pointing the way to escaping the debt trap completely, but the numbers speak for themselves. By looking beyond the monthly payment, and considering all of the interest you would pay over the life of your current loan and a refinancing, you can make a much more informed decision, while saving oodles.
This is a radical notion in a society that always tells you to borrow more.
While offered rates can change on a daily basis,
Bank of America
on Monday was offering a "conventional" 30-year mortgage refinancing for $200,000 at a rate of 4.25%. The bank charges 1.125 "points" at closing, or a fee of $2,250 to lock in that rate. Factoring-in the points and loan amortization, the Annual Percentage Rate, or APR for the 30-year fixed refinancing, is 4.401%.
The APR can be confusing, but is also useful if you are comparing competing offers, based only on the rate and the points.
When we say "conventional," we mean that the loan is not guaranteed by the Federal Housing Administration, and therefore does not require the borrower to pay for insurance that protects the lender.
Bank of America's 15-year mortgage refinancing for $200,000 was 3.625%, also with 1.125 points, for an APR of 3.891%.
At Chase Online (Chase is held by
), the basic rate offered on Monday for a 30-year fixed refinance was also 4.25%, with an APR of 4.345%. Chase was offering a 15-year fixed refinancing at a rate of 3.50%, with an APR of 3.646%.
Of course, these rate quotes are not specifically for HARP refinancing, but they illustrate what's going on in the mortgage market and the following illustrates how much you can save in interest.
Here are a couple of examples comparing what's available for 30-year and 15-year refinancing deals, and the type of decision you might be faced with.
Let's say that you purchased a home for $300,000 back in early 2006, borrowing $240,000 for 30 years at a fixed rate of 6.00%, and began making payments in March 2006. Using a 30-year payment schedule, your monthly payment of principal and interest is $1,438.93. You have made 69 monthly payments so far, including the November payment, paying a total of $79,656.89 in interest. Your remaining loan balance is $220,371.05.
That's right. After paying nearly $80,000 in interest you have paid off less than $20,000 of your loan balance.
The total additional interest you would pay over the remaining 293 payments would be $198,352.31.
If you were to refinance the remaining balance of $220,371.05 with a new 30-year deal at the 4.25% rate offered by Bank of America and Chase, your monthly principal and interest payment would be $1,084.10, and the total amount of interest you would pay over the life of the new 30-year loan would be $169,900.92. You're saving over $28,000 in interest, while adding another 6 years of payments before you get the mortgage monkey off your back. Then again, you're freeing-up over $350 in monthly cash flow, which could be your primary concern.
If instead you chose to refinance the remaining balance at Chase's offered 15-year fixed rate of 3.50%, your monthly principal and interest payment would increase to $1,575.40, and the total amount of interest you would pay over the life of your new loan would be $63,199.72.
So in exchange for suffering reduced monthly cash flow of $136.47, you would save over $135,000 in interest when compared to the current 6.00% loan, while paying-off the house nine years earlier.
When compared to the 30-year refinancing at 4.25% , you would save nearly $107,000 in interest, while escaping the mortgage trap 15 years earlier.
If you have decided that you want to stay in your home, but are struggling with monthly cash flow, take the 30-year refinancing. If your primary concern is paying as little interest as possible while escaping debt in a reasonable time frame, the 15-year refi speaks for itself.
Of course, the expanded HARP only applies to about half of U.S. mortgage loans. If your loan didn't originally qualify as a Fannie Mae or Freddie Mac loan, you will probably be looking once again at 80% loan-to-value ratios being required, which could mean that in order to refinance, you would have to bring cash to the table. This could be an option for you, and could make the 15-year scenario, and all the savings on interest, possible.
And when you avoid paying interest, that's a guaranteed return, while investment returns on your savings isn't guaranteed.
Discussing your refinancing options, in detail, with your current loan servicer or with another mortgage lender can help you get a better handle on your entire financial picture, and these low rates point to a silver lining of the financial crisis. A sacrifice made now, can set you up for a much healthier situation down the line.
Yes, plans change and people move. But if you sell your home, you will have saved on interest in the meantime, and if you had to pay-down your loan balance while refinancing because your home had lost value and you couldn't refinance through HARP, that will already have been done, making it much easier to sell the home.
Once again, the radical notion being discussed is becoming debt-free. Consider a top-down approach to managing your finances, to make escaping the debt trap your goal.
We need to learn similar lessons to the ones our grandparents learned during the depression, and with opportunities to borrow for unnecessary purchases staring us in the face each day, it is hard to resist the debt trap.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.