Under the changes to the Home Affordable Refinance Program (HARP)[1] announced late last year, borrowers with loan-to-value (LTV) ratios greater than 125% will now have the opportunity to refinance. In addition, these changes provided pricing incentives for borrowers to choose a shorter term mortgage.
This Mortgage Market Note provides a simple example to illustrate outcomes for underwater borrowers of choosing between two mortgage products:
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A 30 year fixed rate mortgage that will lower a borrower’s monthly payment, but will extend the amount of time the borrower is underwater.
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A 20 year fixed rate mortgage that will not meaningfully lower a borrower’s monthly payment, but will significantly reduce the amount of time the borrower is underwater.
In 2012, borrowers refinancing under HARP have been increasingly choosing shorter terms. The percentage of underwater HARP borrowers selecting a 15 or 20 year mortgage has increased from 10% in 2011 to 17% in the first six months of 2012.
[1] http://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Fannie-Mae-and-Freddie-Mac-Announce-HARP-Changesto-Reach-More-Borrowers.aspx