A negative equity mortgage occurs in cases where the original value of a home used to secure a loan is now less than the outstanding balance on the loan.
Negative equity mortgage: Can I still refinance?
A reader recently wrote a great question. It went like this:
I want to refinance, but my home (along with everyone else) is worth less than before. You say my loan-to-value ratio is too high.
Is there a way to refinance with negative equity?
It is possible to refinance an underwater mortgage, but it is not easy. You have two options:
- First, you can try to refinance with one of the government homeowner assistance programs.
- Or you can bring cash to closing, which is not possible for most homeowners.
As a result of the housing crisis, the government has created several programs for homeowners hard times. With these programs you can refinance even if you have negative equity. In most cases, you need to be current on your mortgage – if you start missing payments, it can hurt your chances.
Which refinance program should you use? It depends on how you got your mortgage loan (or to be more specific, it depends on who currently owns your loan) in the first place. Borrowers may find that their loan is with Fannie Mae or Freddie Mac – this is possible even if you have never heard of these organizations – so that is HARP 2.0 program their only option.
For other mortgages, read up on the different refinancing programs available.
Where to start: Paying the mortgage
There's really only one other way to refinance with negative equity, and that's to pay money down. This allows you to reduce the amount you owe either by making a large payment on your current loan, or by paying cash at closing when you refinance.
Your loan to value ratio is what has prevented you from refinancing . This ratio describes how much you borrow compared to the total value of your home. In a negative equity situation you borrow more than the home is worth, and most lenders do not want to take that kind of risk. If things go sour, they won't be repaid – even if they sell your home. As a result, they only offer to refinance if you surrender the loan balance (or if the value of your home declines).
Unfortunately, this approach requires that you have access to a lump sum . Most homeowners are unable to write a large check, so the government refinance programs listed above are their only option.
If you are unable to refinance, you may still be able to improve your situation . Ask your lender if you can do a loan modification, or if they have any other suggestions for you. Most lenders would rather work with borrowers to get regular payments back on schedule than terminate the borrower or abandon their payments. Inquire about changing the terms of your loan to see if anything else can be done.