What’s the Difference Between a Traditional Refinance and a HARP Refinance?
Mike Aubry | Zillow Blog | October 17, 2013 | link
Traditional refi vs. HARP refi
Why do people refinance their mortgage? The answer is simple – to lower your interest rate, start building equity in your home faster and change the terms of your mortgage. A refinance is basically a restructure of your loan but the process is much like closing on a home again; an existing mortgage is paid off and a new one is created.
In a traditional refinance, there are two types of refinances – “plain vanilla,” where the existing mortgage balance is refinanced, or a “cash-out,” where a new loan that exceeds the previous mortgage is taken out. In order to qualify, your finances have to be in good shape and banks also consider your home’s loan-to-value (LTV) ratio to determine if you qualify for a refinance.
With the advent of the housing crisis in 2008, many homes lost value and are now in negative equity or “underwater.” When that happens, your LTV ratio might be higher than what lenders are comfortable with (typically 80 percent) and you may be denied for a traditional refinance – even if your finances are in good shape! Once you’re underwater, it is pretty difficult to qualify.