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HAMP versus HARP: Which Is Right for You?

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If you're looking for a lower interest rate, you can choose a traditional refinance, a government HARP refinance, a government HAMP modification, or a modification from a private lender. If you qualify, the most advantageous program is HAMP -- it's essentially a refinance that costs you nothing, and your interest rate can be modified to as low as 2%. No private mortgage product on the market can compete with that.

How Does HAMP Help?

HAMP was designed to let homeowners avoid foreclosure by subsidizing mortgage lenders' modifications to borrowers' home loans. To qualify for a HAMP modification, you must:

  • Use the home as your primary residence
  • Have a mortgage less than or equal to $729,750
  • Have gotten your mortgage before January 1, 2009
  • Have a housing payment including principal, interest, property taxes, HOA dues, and insurance that exceeds 31% of your gross (before tax) monthly income
  • Have a documentable hardship -- either a significant reduction in income or increase in expenses that was beyond your control
  • Have a stable source of income sufficient to make a modified payment

If you meet these criteria, contact your lender and start to gather your paperwork. You'll have to document your income, debts, assets, and hardship before you can get a trial modification, and ultimately a permanent one. The average modification under this program saves homeowners about $500 a month, so if you are eligible, make that call to your lender sooner rather than later.

This Is How the HARP Sounds

HARP was created to let creditworthy homeowners who are underwater (mortgage is greater than home's value) on their mortgages refinance to the lowest available mortgage rates. You don't have to be cash-strapped or at risk for foreclosure. To qualify for HARP, you must:

  • Own a one- to four-unit home
  • Have a mortgage that is owned or guaranteed by Fannie Mae or Freddie Mac
  • Have no late mortgage payments (more than 30 days late) in the last 12 months
  • Owe no more than 125% of the value of your home (on the first mortgage; combined loan-to-value ratio can be higher -- only first mortgage is refinanced).

If you meet these criteria, contact your loan servicer about a HARP refinance. Only a servicer can tell you if you're eligible, but you can go to any Fannie Mae or Freddie Mac lender for your refinance. However, if your application does not get approved from an automated underwriting service, you have to get your refi from your current servicer. In addition, using a different lender from your current one may make it difficult or impossible to get mortgage insurance coverage. If you have a second mortgage, you can still refinance a first mortgage of up to 125% of your home's value -- as long as the holder of the second lien agrees to subordinate it again to the new first mortgage.

Outside the System

If you aren't underwater on your mortgage and don't qualify for a HAMP modification, a traditional refinance may be your best bet. You can get the lowest mortgage rates by opting for an ARM or hybrid ARM (such as a 5/1 program which gives you a fixed rate for the first five years at generally 1% less than the 30-year fixed rate). If you have little equity, an FHA refinance may be your only option, but you can avoid Fannie Mae or Freddie Mac's high loan-to-value pricing adjustments, and qualification is easier, too.

Finally, if you are in trouble with your mortgage and don't officially qualify for HAMP (for example, if your troubled loan is for a rental property you own), try your mortgage lender anyway. Homeowners are getting modifications outside the system when the lender determines that it will get more cash flow by modifying your mortgage than they will by foreclosing. It never hurts to ask!

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

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