Jay Farner, president of Quicken Loans, wants homeowners to get HARP’ed in the worst way. He calls it a reward for paying your loan on-time and a financial tool, even if you owe more than your home is worth. I say that’s BS. Don’t get HARP’ed until you get all the facts and examine your financial state of affairs.
Really, Jay? Are you counting on consumers being so ill-informed?
Why am I so negative about HARP? The first clue comes at the end of Mr. Farner’s advertisement — “important terms and conditions apply.” The second is using math as our guide, most refinances never make financial sense regardless of the program used.
Whenever a homeowner refinances there are important up front costs associated with the loan. A total accounting of these costs reveal each transaction is more expensive than what is widely viewed as the norm. It is critical to first find out how quickly it takes your slightly lower payment to repay ALL the transactions costs associated with the loan. My rule of thumb is if it is longer than 12 months, the loan is already too expensive, even if at zero points.
There are two kinds of costs typically associated with a loan transaction: non-occurring and re-occurring. A sample HUD-1 settlement sheet is attached below for your review. Page two is the critical one for refinance transactions. Look at this sheet closely. Become familiar with all the line items.
One time closing costs include:
Loan origination and discount fees (they are the same!);
Credit report fees;
Appraisal costs (usually paid outside of closing now);
Lender inspection fees;
Mortgage insurance application fees; and
Assumption fees (if applicable).
Closing costs that are included in every refinance loan:
Title company fees;
Title insurance (owners and lenders);
Wire fees;
Pre-paid interest and escrows for homeowners insurance and county taxes;
Recordation fees and/or taxes; and
Survey and pest inspection fees.
Yes, there are a lot of fees and that alone should stop anyone from refinancing into HARP. I have yet to find reliable data on the average cost of these loans but I am betting it is north of $4,000. Paying off your old loan, depending on the size, and the prepaid interest for the new loan, could easily be several thousand dollars.
Even though closing costs are daunting, there are three more critical points to consider. One is family income. Second, what is the status of your living costs — kids, expenses that fall outside your credit report, particularly home repair costs. Finally, how many payments have been made on your current loan?
So, let’s talk about family income. This subject is poorly understood. Most borrowers only want to know if they make enough to qualify. That is a touch on the short-sighted side. A lot more analysis of your finances must be taken.
First and foremost, is your family income holding steady, declining, or increasing. And if it increased, how do the raises compare with the rate of inflation? What is likely for the future? Even if a shorter term loan is used to refinance, fifteen years is still a long time. Inflation may be low now, but who knows what will happen over 15 or 30 years. If your total debt to income ratio’s are above 33% but your income is flat or has not kept pace with inflation, then refinancing into a HARP, or any loan, does not make sense. A better move is to sell and downsize your home, even if that means a short sale.
Income status is critical because of all the other costs associated with life that never get included into a loan application. Kids until they reach 18 years of age can cost as much, or more, than a mortgage or home. Home repair costs over the life of a house are in the tens of thousands of dollars. Commodities — from food to gas increase all the time. Having income that is barely good enough to get a loan will not cut it.
Last, how many payments have you made on your current loan. Amortization schedules are heavily front loaded with interest for the first 10 to 12 years depending on interest rate. If you have paid the first six, seven, or even eight years of your loan, it makes no sense to begin all over again at payment one, regardless of the term. Becoming mortgage free in a financially prudent manner is the goal to achieve, not adding more years of payments, and financial risk, on to your life.
This is the big picture Jay Farner hopes you never consider. Jay wants you to make an impulsive decision and refinance after listening to his folksy ad. Please stop and think before you pull the trigger. Get with your accountant and any other financial professional at your disposal. Ask your loan officer hard questions. Home ownership is serious stuff and deserves more than an impulsive action.
The funny thing is, I doubt that Quicken Loans, or any other lender, has thought through all the risks associated with HARP or any other refinance transaction. Isn’t that right, Jay?
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