HARP Loans Pros And Cons

The Home Affordable Refinance Program (HARP) was a federal initiative designed to assist homeowners who were underwater on their mortgages or had little equity in their homes. Launched in 2009 as a response to the housing crisis, HARP aimed to provide relief to borrowers by allowing them to refinance their mortgages at lower interest rates, even if their homes had decreased in value. While the program officially ended in 2018, understanding its pros and cons remains relevant for those studying the impact of government interventions in the housing market and for potential future similar programs.

Pros	Cons
Lower monthly mortgage payments	Limited eligibility criteria
Reduced interest rates	Potential for higher overall costs
No underwater limit	Risk of resetting the loan term
Streamlined refinancing process	Possible negative impact on credit score
Option to switch to fixed-rate mortgage	Limited lender participation
No appraisal required in many cases	Inability to combine first and second mortgages
Potential for building equity faster	Program expiration

Advantages of HARP Loans

Lower Monthly Mortgage Payments

One of the primary benefits of HARP was its ability to significantly reduce monthly mortgage payments for eligible homeowners. This was achieved through:

Refinancing at lower interest rates
Extending the loan term
Switching from adjustable-rate mortgages (ARMs) to fixed-rate mortgages

For many homeowners struggling with high mortgage payments, this reduction provided much-needed financial relief and helped prevent potential foreclosures. In some cases, borrowers reported savings of hundreds of dollars per month, which could be redirected towards other financial goals or used to improve their overall financial stability.

Reduced Interest Rates

HARP allowed homeowners to take advantage of lower market interest rates, even if they owed more on their mortgage than their home was worth. This was a significant departure from traditional refinancing options, which typically require a certain level of equity in the home. By accessing lower interest rates:

Borrowers could save substantial amounts over the life of their loan
The total cost of homeownership decreased
Homeowners could potentially pay off their mortgages faster by applying the savings to the principal

It’s worth noting that even a small reduction in interest rate could translate to tens of thousands of dollars in savings over a 30-year mortgage term.

No Underwater Limit

One of the most innovative aspects of HARP was its removal of the loan-to-value (LTV) cap for fixed-rate mortgages. This meant that:

Homeowners could refinance regardless of how far underwater they were on their mortgage
Those in areas with significant property value declines could still benefit
The program provided a lifeline to borrowers who might otherwise have had no refinancing options

This feature was particularly beneficial in regions like Nevada, Florida, and parts of California, where home values had plummeted during the housing crisis.

Streamlined Refinancing Process

HARP was designed to simplify the refinancing process, making it easier and faster for homeowners to take advantage of the program. Key streamlining features included:

Reduced documentation requirements
Waiver of certain underwriting criteria
Automated valuation models instead of full appraisals in many cases

This streamlined approach not only saved time but also reduced the costs associated with refinancing, making the program more accessible to a broader range of homeowners.

Option to Switch to Fixed-Rate Mortgage

For homeowners with adjustable-rate mortgages (ARMs), HARP provided an opportunity to switch to a fixed-rate mortgage. This option offered several benefits:

Protection against future interest rate increases
More predictable monthly payments
Improved long-term financial planning

In an environment of historically low interest rates, locking in a fixed rate through HARP could provide significant long-term savings and peace of mind for borrowers.

No Appraisal Required in Many Cases

Traditional refinancing often requires a home appraisal, which can be costly and time-consuming. HARP frequently waived this requirement, offering advantages such as:

Reduced upfront costs for borrowers
Faster processing times
Elimination of the risk of refinancing falling through due to a low appraisal

This feature was particularly beneficial for homeowners in areas where property values had not yet recovered from the housing crisis.

Potential for Building Equity Faster

By reducing monthly payments and interest rates, HARP created an opportunity for homeowners to build equity in their homes more quickly. Borrowers could:

Apply the monthly savings to their principal balance
Choose a shorter loan term without significantly increasing their monthly payment
Potentially reach positive equity sooner than they would have with their original mortgage

This accelerated equity building could improve homeowners’ financial positions and increase their options for future property transactions or refinancing.

Disadvantages of HARP Loans

Limited Eligibility Criteria

While HARP aimed to help a broad range of homeowners, its eligibility criteria excluded many potential beneficiaries. Key limitations included:

Mortgages had to be owned or guaranteed by Fannie Mae or Freddie Mac
The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009
Borrowers needed to be current on their mortgage payments
Those who had previously refinanced under HARP were generally ineligible (with some exceptions)

These restrictions meant that many homeowners who could have benefited from the program were unable to participate, leading to criticism that HARP didn’t go far enough in addressing the housing crisis.

Potential for Higher Overall Costs

While HARP could lower monthly payments, it sometimes resulted in higher overall costs for borrowers. This could occur due to:

Extending the loan term, which could increase total interest paid over the life of the loan
Rolling closing costs into the new loan, increasing the principal balance
Resetting the amortization schedule, potentially leading to more interest paid in the early years of the new loan

Borrowers needed to carefully consider the long-term financial implications of refinancing through HARP, not just the short-term benefits of lower monthly payments.

Risk of Resetting the Loan Term

Refinancing through HARP often meant resetting the loan term to 15 or 30 years. While this could lower monthly payments, it also meant:

Potentially paying on the mortgage for a longer period
Delaying the date of full homeownership
Possibly being in debt later into retirement

For homeowners who had already paid several years on their original mortgage, this reset could be a significant drawback.

Possible Negative Impact on Credit Score

While HARP itself didn’t directly harm credit scores, the refinancing process could have some negative effects:

The credit inquiry required for the new loan could temporarily lower the credit score
Closing the old mortgage account and opening a new one could affect the average age of credit accounts
If the refinance resulted in a higher loan balance, it could increase the credit utilization ratio

These factors could potentially lead to a short-term decrease in credit scores, which borrowers needed to consider, especially if they were planning other major financial transactions in the near future.

Limited Lender Participation

Not all lenders participated in the HARP program, which could limit options for borrowers. This limitation:

Reduced competition, potentially leading to less favorable terms
Made it difficult for some borrowers to find a participating lender
Could result in higher fees or interest rates if fewer lenders were available

Borrowers often had to shop around to find a participating lender, which could be time-consuming and frustrating.

Inability to Combine First and Second Mortgages

HARP did not allow borrowers to combine a first and second mortgage into a single loan. This limitation:

Prevented some homeowners from fully benefiting from the program
Could complicate the refinancing process for those with multiple mortgages
Might result in less overall savings compared to consolidating all mortgage debt

For homeowners with home equity loans or lines of credit in addition to their primary mortgage, this restriction could significantly reduce the potential benefits of HARP.

Program Expiration

As a temporary program, HARP had a set expiration date, which was extended several times before finally ending in 2018. This expiration:

Created a sense of urgency that could lead to rushed decisions
Left some homeowners without options once the program ended
Highlighted the need for more permanent solutions to address ongoing housing market challenges

Frequently Asked Questions About HARP Loans Pros And Cons

What were the main benefits of HARP for homeowners?
HARP allowed underwater homeowners to refinance at lower interest rates, potentially reducing monthly payments and overall loan costs. It also provided options to switch from adjustable-rate to fixed-rate mortgages and often waived appraisal requirements.
Why did some homeowners not qualify for HARP?
Eligibility was limited to mortgages owned or guaranteed by Fannie Mae or Freddie Mac, originated before May 31, 2009. Borrowers also needed to be current on payments and not have previously refinanced through HARP.
Could HARP negatively impact a borrower’s credit score?
While HARP itself didn’t directly harm credit scores, the refinancing process could temporarily lower scores due to credit inquiries and changes in credit account age. However, the long-term benefits often outweighed these short-term effects.
Was there a limit to how underwater a mortgage could be for HARP eligibility?
For fixed-rate mortgages, HARP removed the loan-to-value cap, allowing homeowners to refinance regardless of how far underwater they were. However, adjustable-rate mortgages had a 105% LTV limit.
Did HARP allow combining first and second mortgages?
No, HARP did not allow borrowers to combine first and second mortgages into a single loan. This limitation could reduce the overall benefits for homeowners with multiple mortgages.
How did HARP differ from traditional refinancing options?
HARP offered a streamlined process with reduced documentation, often waived appraisals, and allowed refinancing for underwater mortgages, which traditional refinancing typically doesn’t permit.
Could HARP result in higher overall costs for borrowers?
Yes, in some cases. While monthly payments might decrease, extending the loan term or rolling closing costs into the new loan could increase the total amount paid over the life of the mortgage.
Why did HARP have an expiration date?
HARP was designed as a temporary program to address the housing crisis. Its expiration encouraged timely participation but also meant that some homeowners missed out on potential benefits if they didn’t act before the deadline.