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The Obama administration’s effort to encourage homeowners to refinance their mortgages under the Home Affordable Refinance Program (HARP) represents a reasonable approach at helping homeowners benefit from the current low mortgage rates. The HARP reduces the high costs of refinancing and in some cases makes refinancing possible for properties whose values have fallen below the mortgages’ values. While this will provide the intended benefit of increasing the homeowners’ income by reducing their mortgage payments, a closer inspection of the refinancing process in the US reveals that the current treatment of prepayment in US mortgages provides a disincentive for homeowners to accumulate equity in their houses. We propose a new mortgage contract, one which augments the terms of the existing conventional fixed-rate mortgage, which encourages homeowner equity accumulation thus leading to a more stable housing sector that can better weather future house price declines. From an economic policy perspective, the ability to reduce long term debt payments will have the same economic effect of increasing household’s permanent income which can provide a boost to the economy. This new mortgage proposal can be implemented by the government at little to no cost.


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