- The amount of equity you have in your home can quickly derail your attempts to gain a mortgage refinance. Depending on the size of your home loan and the reduction in your interest rate provided by a refinance, you could cut your monthly mortgage payment by more than $100 by refinancing. For example, if you have a 30-year fixed-rate $250,000 mortgage loan at an interest rate of 6 percent, you'd save $194 every month by refinancing your loan to one with an interest rate of 4.75 percent. Most lenders, though, require that you have at least 20 percent equity built up in your home before they'll approve your refinance application. This can be a problem if your home has dropped in value since you purchased it.
- To help homeowners with little to no equity in their home, the federal government in 2009 initiated its Home Affordable Refinance Program (HARP). This program provides financial incentives to lenders every time they approve a borrower's refinance request, even if that homeowners lacks the 20 percent equity lenders usually require. Under the government program, homeowners can qualify for a refinance even if they owe up to 125 percent of a home's value on their mortgage loan. As an example, homeowners with residences valued at $200,000 can qualify for a refinance if they owe up to $250,000 on their mortgage.
- However, a refinance through this government program can end in frustration depending on the decision of a real estate appraiser. Before approving your refinance request, mortgage lenders send an appraiser to determine the current market value of your home. If this appraiser submits an extremely low figure for the home's value, you might end up owing more than 125 percent of your residence's value on your mortgage loan. If this happens, you won't qualify for a refinance through the Home Affordable Refinance Program.
- The appraisal issue is a bigger problem under the Home Affordable Refinance Program, because with this program, you can only work with your existing mortgage lender to obtain a refinance. With a traditional mortgage refinance, you can apply for a refinance with any lender licensed to do business in your state. However, if your lender refuses your request for a refinance through the government program because of a low appraisal, you can't participate in the Home Affordable Refinance Program with another lender. Another lender might appraise your home at a higher value, but that is not an option under the government program.
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