Editor’s Note: The HARP program expired December 31, 2018, and a popular replacement option, the Freddie Mac Enhanced Relief Refinance (FMERR) loan expired September 30, 2019.
However, Fannie Mae’s High LTV Refinance Option (HLRO) currently has no expiration date. Similar to HARP and FMERR, it’s a great loan option for underwater homeowners who don’t have enough equity earned in their home to qualify for a refinance.
The Home Affordable Refinance Program, or HARP has helped millions of underwater homeowners.
But millions more are not eligible because their loan is not owned by Fannie Mae or Freddie Mac.
Still others are not eligible for HARP because they
- have used HARP before on the same property
- closed their loan after May 31, 2009
- have more than one late mortgage payment in the last 12 months.
There are other refinance options available when you think outside the HARP box.
Most homeowners have heard of a cash-out refinance. It allows those with equity in their homes to receive cash at closing.
A cash-in refinance is the opposite. The homeowner puts cash into the transaction to close the loan because they don’t have enough equity.
This type of loan doesn’t sound like a good deal on the surface, but it can work out in the homeowner’s favor.
Here’s how. Say you could save $350 per month by refinancing. But you are $10,000 short on equity and not HARP eligible. You could take $10,000 from another source to complete the refinance.
Once you have enough cash, a myriad of loan types are available. You are no longer stuck in the HARP ineligible jail cell. Fannie Mae, Freddie Mac, FHA, and VA refinance types suddenly become real options for reducing your high mortgage interest rate.
Eligible Sources of Funds for a Non-HARP Cash-in Refi
The biggest hurdle with a cash-in refinance is where to get the cash. It might not be as hard as you think.
The funds could come from a number of sources.
A personal loan or line of credit
Local banks and credit unions offer personal lines of credit. These are not attached to your home but are unsecured loans meaning you don’t need an asset as collateral.
Just remember you’ll need enough income to qualify for the line of credit and refinance loan.
A current investment or savings account.
Do you have a savings account making a dismal one half of one percent interest per year? Why not make money by saving money on your monthly home payment instead?
Instead of making $50 per year in interest, you could be saving hundreds of dollars per month.
Sale of an asset like a car
Obviously you need a car to work. But many people have way too much equity tied up in a car. It might be worth it to sell the vehicle, buy a more modest one, and use the net proceeds to refinance. It’s a sacrifice, but one that will lower your bills and make you more financially healthy.
A gift from a relative
You can receive a cash gift to make up the gap between your loan and negative equity. It’s a lot like raising funds for down payment to buy a house. Gift funds can come from the following sources.
- A spouse, child, or legal dependent.
- Another relative who is related by blood, marriage, adoption, or legal guardianship
- A fiancé, fiancée, or domestic partner.
Be sure to follow the guidelines for gift funds as outlined here.
How a Cash-in Refi can Pay Off
While it may sound like you’re robbing Peter to pay Paul, the numbers can work out surprisingly in your favor.
Let’s look again at the scenario in which you could save $350 per month by coming up with $10,000.
You’re going to make just a fraction of that amount in interest each month by keeping the cash in savings.
Likewise, your monthly cost for a $10,000 unsecured line of credit would be much less than $350 per month. If you assume a payment of $100 per month for a small loan, your net savings is still $250 per month.
A refinance lowers the interest on your entire loan balance. You’re leveraging a small dollar amount to reduce interest on a very big loan. That reduces overall strain on your budget.
A cash-in refinance is definitely worth a back-of-the-napkin calculation to see if it pencils out.
If you can come up with the cash to make up your negative equity, one of the many non-HARP refinance options become available to you.
Non-HARP Cash-In Refinance Types
If you make up your negative equity with cash, here are your refinance options:
- Refinance up to 97.75% of the home’s current value with a standard FHA refinance.
- Can refinance a loan that is not eligible for HARP.
- Adequate military service required.
- Can refinance out of any loan type up to 100% of the home’s current value.
Conventional Fannie Mae or Freddie Mac Refinanance
- Need 3-5% equity or cash-in to refinance.
- Requires mortgage insurance.
Cash-in Refinance Benefits
If you’re not sure if you can make a cash-in refinance work, it’s a simple as getting a hold of a lender who can work the numbers out for you.
Once you have all the facts, see if the refinance will benefit you, or if you should wait for your home’s equity to go up enough to refinance without any cash.