For many homebuyers purchasing a home is one of the largest and most important investments they will ever make. But what many homeowners are not prepared for is the realization that their home is not worth what it once was and that they now have negative equity in their home. Dean Graziosi explains that before a lender approves a loan, they use the loan-to-value ratio to determine whether a borrower is a high or low risk. The lower a borrowers value is, the lower the risk they are to a lender. This is also the same method that is used when you refinance your home as well.
In order to be deemed a good risk, lenders look for a LTV that is 80% or lower. Borrowers can expect that over the life of their loan, their LTV will change depending on the current state of the real estate market. If a homeowner reaches the point where their loan-to-value ratio is over 100% they are considered to be underwater on their mortgage and owe more than what their home is worth at the time. If a homeowner reaches this point, Mr. Graziosi states that it may be difficult for them to refinance.
Many homeowners who have homes that have lost value tend not to have any difficulty remaining current on their mortgage payments; however, during this time they are not building any equity in their homes. Because of this, the government chose to create the HARP program, also known as the Home Affordable Refinance Program. This program was designed to allow borrowers who owe more than what their home is worth to take advantage of the lower interest rates and refinance their mortgage.
When the HARP program was first released, the highest LTV ratio was at 105%, this allowed the majority of homeowners who were affected by the housing crisis to participate in the program and refinance their existing mortgage. Since its release, HARP has undergone many changes which have resulted in the removal of the LTV limit. As it currently stands, anyone who is currently making their monthly mortgage payments and meets the eligibility requirements can take advantage of what the HARP program has to offer.
If you are underwater and are interested in refinancing through the HARP program, you will be able to pay down the amount of principal that you owe and reduce the amount of interest payments you will make over the life of your loan. HARP has proven to be an extremely beneficial program for homeowners who currently owe more than their home is currently worth. If you are currently underwater on your existing mortgage and are at a loss for what your next step should be, you should research everything that HARP has to offer.