While there is debate as to when the housing market began to crash, or what factors fueled the housing crisis which ultimately ignited an economic recession not seen in three generations, there’s no debate about the extensive loss of wealth which hit many homeowners like a kick in the teeth. Over the course of a short two-year period, from 2007 to 2009, the value of real estate owned by U.S. households plummeted by $6,000,000,000,000.1
Count those zeroes…that’s six trillion dollars.
In terms of understanding the depth or magnitude of a number like six trillion, consider this: six trillion seconds equals 189,276 years. There are six trillion miles in a light-year. Six trillion, of anything, is a LOT. But let’s step away from that mind-bending figure and look at an example of what this loss of wealth may have looked like to the average homeowner during the recession.
Harry Homeowner purchased his home when home values were continuing to rise dramatically. He found a great deal on a modest home priced at $300,000. Harry even had enough assets to make a down payment of 20% so that he could avoid costly mortgage insurance. So Harry borrows $240,000 (80% of the purchase price) and he is one happy camper, especially since he was able to get a really low interest rate on his Adjustable Rate Mortgage (ARM). Over time, Harry notices things about the house that he’d really like to improve, like the out-dated kitchen and bathrooms. He also wants to add some outdoor living space and decides to have an in-ground pool built. With interest rates at historic lows, Harry decides to borrow some of the money necessary for these improvements by taking out a 2nd mortgage on his home to the tune of $50,000.
And then the housing market crashes.
During the recession, home values decrease significantly. Harry would like to refinance his home because the interest rate on his 1st mortgage is going to increase soon, and not having the security of fixed rate mortgage is really starting to bother him. But Harry has a major problem. The most recent appraisal of Harry’s home only reflects a valuation of $240,000, and that’s with the improvements he has already made. The valuable equity Harry attained by making a down payment of $60,000, in addition to the equity he should have realized from his home improvements is now gone. The balance on his 1st mortgage stands at $230,000 and he still owes the full $50,000 on his second mortgage. With total mortgage debt of $280,000 on a home that is only worth $240,000, Harry is officially upside down (or “under water”) on his mortgage. And with that interest rate on the 1st mortgage set to increase in the near future, Harry needs to know if there is any way he can secure a fixed rate mortgage in today’s market.
Enter the Home Affordable Refinance Program (a.k.a. “HARP”). If Harry’s 1st mortgage was backed by Freddie Mac or Fannie Mae prior to June 1st 2009, Harry’s mortgage is eligible for refinancing. In fact, under HARP, homeowners can borrow up to 105% of the value of their home to pay off their existing 1st mortgage and finance any costs associated with the transaction. As far as the second mortgage is concerned, it will simply be subordinated to the new 1st mortgage. And even though Harry’s loan-to-value on the new 1st mortgage is in excess of 95%, the fact that he does not currently pay PMI with his mortgage automatically excludes him from paying it on his new mortgage.
UniSource Mortgage Services is proud to offer loans under the Home Affordable Refinance Program. If you, or someone you know, would like a personal consultation with one of our mortgage professionals concerning this program, or any of our other mortgage products, please call us toll-free at 1-800-995-4694, or email us at TeamUnisource@gmail.com.