The 15-Year HARP Refinance

The HARP refinance program has enabled millions of low- and negative-equity homeowners to save billions of dollars by refinancing their mortgages to a new loan at a lower interest rate. But reducing your mortgage rate isn't the only benefit HARP can provide.

HARP can also enable you to pay your loan off faster by refinancing into a 15-year fixed-rate mortgage or other shorter-term loan as well. In fact, nearly one-third of those who refinanced through HARP in the first six months of this year opted for either a 15- or 20-year loan, as opposed to a "standard" 30-year fixed-rate loan, according to the Federal Housing Finance Agency (FHFA).

The advantages of a shorter-term mortgage are many. But there are a couple of downsides as well.

Refinancing when underwater

HARP stands for Home Affordable Refinance Program, a federal initiative. It was launched in 2009 by the Obama administration to help homeowners who were underwater on their mortgages as the result of the housing bubble save money by refinancing into what at the time were considered extremely low mortgage rates.

The number of underwater mortgages has declined since then, but mortgage rates have fallen even further, with typical rates down roughly a full percentage point from the time HARP was launched. With Congress extending the program to the end of 2016, there's still time to take advantage of it if you haven't refinanced already.

Here are some of the things to keep in mind if you're thinking of refinancing into a 20-, 15- or even a 10-year fixed-rate mortgage through a HARP refinance. First, the advantages:

Pay your mortgage off faster

This one's obvious. Refinancing from a 30-year mortgage into a 15- or 20-year one will allow you to pay the loan off faster. That hastens the date you own your home free and clear.

Not only that, but paying your loan off faster means you pay less in mortgage interest. Paying off a $200,000 mortgage over 30 years at a fixed rate of 4 percent means paying nearly $144,000 in interest; paying the same loan off in 20 years reduces the total interest paid to only $91,000 - trimming your interest charges by more than a third.

Refinancing to a shorter term is also a way of staying closer to your current schedule for paying off your mortgage. Given that many people have already been paying on their mortgage for a number of years by the time they refinance, refinancing into a new 30-year mortgage would extend the length of time it would take to pay off their home. A 15- or 20-year mortgage may be closer to the time they have left on their current loan; other terms lengths are available as well.

Lower mortgage rate

Most people refinance mortgages to get a lower rate. But if you go for a shorter term, you can lower your rate even more.

According to Freddie Mac, the current average rate for a 30-year fixed-rate mortgage is 3.90 percent. For a 15-year mortgage, the rate is 3.10. That's a difference of a full four-fifths of a percentage point.

Depending on your current mortgage rate and how long you've had the loan, this lower rate could mean that you can refinance into a shorter term mortgage and end up with about the same monthly mortgage payment you're making right now. So you may be able to shave several years off your mortgage while keeping your monthly payments almost the same or perhaps even a bit lower.

Build equity more quickly

A side effect of shortening your mortgage term is that it allows you to increase your home equity more quickly. That's the percentage of your home value that's paid for and, if you were to sell the home today, would be cash in your pocket.

Increasing your home equity offers several advantages. For one, it offers a financial cushion in the event you need to borrow against your equity for a major expense, such as home repairs or improvements, medical costs or sending a child to college.

Building up equity more quickly also puts you in a better position to move up to a nicer home a few years down the road, if that's your plan. More equity in your current home translates to a bigger down payment on the next, which can give you a better interest rate and other financial advantages.

There's a lot to like about using HARP to refinance into a short-term mortgage. However, there are two major downsides to be aware of as well.

Higher monthly payments

Because you're paying your mortgage off more quickly, your monthly payments will be higher with a 15- or 20-year fixed-rate mortgage than they would be if you refinanced the same amount over a 30-year loan. The lower mortgage rate means you'll be paying less in interest, but you'll be paying significantly more toward your loan principle each month.

A $200,000 mortgage balance refinanced into a 30-year fixed-rate mortgage at the current Freddie Mac average of 3.90 percent will have a monthly payment of $943, not including property taxes and homeowner's insurance premiums. Refinancing the same amount into a 15-year fixed-rate loan at the current rate of 3.10 percent produces a monthly payment of $1,390 - nearly half again as much.

Again, because most people who refinance have already been paying down their mortgage balance for a number of years, refinancing into a shorter-term loan may not produce a monthly payment much different from what they're currently paying. But refinancing back out to a 30-year term could significantly reduce their monthly payment, if that's their main goal.

Just be aware that those lower monthly payments come with a price: the 30-year mortgage in the example above would have total interest costs of nearly $140,000 over the life of the loan, compared to just over $50,000 for the 15-year loan - a hefty difference.

Reduced tax deduction

One of the things that can take borrowers by surprise is how much smaller their mortgage interest tax deduction is after refinancing into low-rate, short-term mortgage. If you're currently paying a rate of 5 percent or more on your current mortgage and refinance to a 15-year rate around 3 percent, that's going to cut your interest payments - and your mortgage deduction - nearly in half.

Not only that, but because you'll be paying down your mortgage balance more rapidly, those interest payments will continue to shrink at an accelerating rate. Given that the 2015 standard deduction is $6,300 or a single person and $12,600 for a married couple, you could find yourself falling below those limits fairly quickly. That can particularly be a problem if you're counting on your mortgage interest deduction to make it practical to itemize other deductions as well.

You'll still save more money because you're paying less in interest and still get the standard deduction, but you need to be aware that your end-of-year tax picture may be a bit different than you expected after refinancing into a 20- or 15-year fixed-rate mortgage.

Are you eligible for HARP?

HARP is designed for low- and negative equity borrowers - you don't qualify if you have more than 20 percent equity in your home (80 percent loan-to-value). On the other hand, you can still qualify even if you're in negative equity - in fact, there's no limit to how far underwater you can be on your mortgage and still qualify for HARP.

The other major limitation is that your mortgage must be backed by either Fannie Mae or Freddie Mac to be eligible. Most mortgages in the United States are, but you aren't eligible if you have an FHA, VA or USDA mortgage. Fortunately, those loans have their own options for low-equity and underwater refinancing, so you really don't need HARP for them.

You do have to be current on your mortgage payments and meet conventional requirements for income, financial liabilities and credit rating. Interest rates and fees are comparable to those on a conventional mortgage or refinance.

See this link for more information on HARP , including more detailed information on eligibility guidelines an online link to find out if your mortgage is backed by Fannie Mae or Freddie Mac.