How to Refinance an Upside Down Mortgage
Is it possible to refinance when you’re upside down in your mortgage loan? And if so, how do you go about it? These are the questions we will address in today’s lesson.
A couple of weeks ago, I heard a statistic that said 12 million homeowners were upside down in their mortgage loans (meaning they owe more on their mortgages than the home is worth in the current economy). I would venture a guess that this number will grow in the coming months. That’s because home prices are still falling in some areas of the countries, and the bottom of the market might not come until late 2010 or 2011.
What Does Upside Down in a Mortgage Mean?
If you’re not familiar with the term “upside down” in a loan, or how the situation arises in the first place, here’s a quick overview. Let’s say you purchased a $400,000 home in 2005, in a city that was experiencing a big real estate bubble (fast rising prices). In 2008, we saw the beginning of a housing crash that would ripple through our entire economy.
Four years later, you find that your home is only worth $215,000 in the current market. The problem is, you still owe $320,000 on the house. You owe more than the home is worth in the current economy — so you are upside down in your mortgage loan. This is also referred to as being “underwater” in the loan. They both mean the same thing.
Can You Refinance In this Condition?
Many of these same homeowners are trying to refinance their mortgage loans in order to take advantage of low interest rates. Many people are also hoping to refinance away from their adjustable-rate loans and into a more predictable fixed-rate mortgage. But they are hitting roadblocks because they are upside down in their loans.
Generally speaking, lenders will require you to have a certain amount of equity (ownership) in your home, before they’ll approve you for a refinancing loan. But when you are upside down, you actually have negative equity — you owe more than the property is worth. This is why so many people are being turned away when trying to refinance. They lack the equity needed to get approved.
So, are there any ways to refinance when you are upside down in in a mortgage loan? Yes, but it depends on how much you are underwater. If you are only slightly underwater in your home, you might qualify for refinancing assistance. The federal government recently announced the Making Home Affordable program, and part of it is designed to provide refinancing options for upside down homeowners.
There’s another caveat to this government program. Your mortgage loan must currently be owned by Freddie Mac or Fannie Mae. You can ask your lender about this, or you can look up your loan through the Fannie or Freddie websites. This is the page for a Fannie mortgage search, and this is the Freddie look up.
Last week, I posted a comprehensive tutorial on refinancing and modification programs. Check out our guide to government mortgage programs to learn more about them.
If you are underwater by more than 5% or so, you might be out of luck. Despite my research effort, I’ve not yet been able to find any refinancing options for people with severely negative equity. But I’ll certainly keep you posted! Bookmark this blog, or add our RSS feed to your feed reader, so you can stay tuned.
Update:
After posting this article, I did some additional research on the subject. Here is recent news and information about upside down homeowners, mortgage refinance, and similar topics.
- On March 4th, an MSNBC article reported that another 700,000 homeowners slipped into negative equity situations during the previous quarter. Learn more
- California, Florida and Nevada are some of the states most affected by underwater mortgage situations. A recent article in the Las Vegas Review-Journal suggested that 60% of homeowners in that city are upside down in their loans. Learn more
We will keep you posted on new developments as they arise. Check back often, or bookmark this blog for future reference. You might also like the new refinancing blog on our parent website.
Mortgage Refinancing | Brandon | 
March 27, 2009 10:04 am
By Sue, May 7, 2009 @ 12:30 pm
I have a mortgage of 430,000.00 excellent credit but home is worth 330,00.00
lender won’t refinance..I am not on fixed rate..
what should I do??
By admin, May 7, 2009 @ 1:27 pm
Hi Sue. There’s not much you can do in a situation like this, as far as refinancing goes. You cannot refi when you’re upside down by that much, which is the premise of the article above. If you want to stay in the home, then by all means do so. Who knows … you might even regain some of that lost equity over time.
By kathy, May 15, 2009 @ 11:37 am
We have a 1st mortgage for 240K and 2nd 90K, the house is now worth 315K, are under 15K. We have called many banks and they won’t refinance us… Do we have a chance to refinance and how??? We have excellent credit… Thank you
By Brandon, May 16, 2009 @ 8:43 am
Kathy,
I think you’ve answered your own question by saying this: “We have called many banks and they won’t refinance us.”
In certain scenarios, it’s just not possible to refinance. Nothing I can say would change that.
By Butch, May 22, 2009 @ 9:41 am
I have a house mortgage that balloons in September and that appears greater than the value of houses selling in the neighborhood. 1) What is an inexpensive way to check the actual appraised value of my house? 2) If my house has a value less than my mortgage, what options do I have when the balloon comes due? What are the consequences of each option?
By Brandon, May 28, 2009 @ 4:10 pm
Butch — I’m not sure if this three-part essay question is for me, or for other visitors. So I’ll just post it here and see what happens.
By Rob, May 31, 2009 @ 8:50 am
I own a house in RI. I currently have a mortgage at 6.25 with 188k left on the note. I would like to refi into low 5%, but I am fairly sure I am either at break even on home value, or possibly even upside down. I have just completed a complete kitchen renovation and am going to do a few other improvements (siding + other things). Should I just complete these projects 1st and then see whats out there for refi options since I will have maximized my house’s value? Or should I just start looking now.
By Peter, June 1, 2009 @ 7:41 pm
I’m pretty much in the same boat as the others but I’ll give it a shot anyways…
I live in a condo in Fremont, CA and owe about $317,000 @ 6.25% BofA told me that my condo is worth $263,000 (based on other units that have been sold nearby). I know I can’t refinance since I have negative equity…is there any other option for me?
I’ve considered purchasing a new home and letting this condo go as a short-sale, possibly foreclosure; however, I don’t have the minimum 10% down payment (at least $35K-$40K for this area).
Any ideas?
By Linda S., July 8, 2009 @ 7:33 am
Hello,
We live in Avondale, AZ-purchased at 260,000 put 30,000 down and have a balance of 228,000 on a loan at 6.25% and now our house is somewhere valued at 105,000. Just heard that now they have a program for a 25% upside down rate. Do you think we could take advantage of this? If not do you think there is anything we can do besides putting money into something that we probably won’t get any return on??
By Mick, August 25, 2009 @ 5:43 am
Answer for Perter.
You can buy the 2nd house as an FHA loan (3.5% down), but you have to have a 2 year steady work history and your current mortgage cannot be FHA. Other restriction can apply. Check FHA.com. [Editor's note: FHA.com is a profit-driven website designed to capture mortgage leads. It is NOT a government website.]
I am in similar situation. My condo is now worth $55k I own $105k on it. I am buying a house now and I am going to rent the condo (I already found a tenant). The rent is going to cover my mortgage payments I am going to cover the association on the unit from my pocket (a little loss that I will recover from taxes at the end of the year).
I do not want to foreclose or short sale on the condo as this would not help the housing market. I do not want to be a part of the statistic. I hope the market will recover and in few years I will own two properties.
I would love to refinance the loan on the condo but I know it is impossible at this time.
By Karen, August 27, 2009 @ 3:58 pm
We are in the same boat as a lot of people. We are upside down in our mortgage, current with our payments but are not struggling. The only debt we have is our mortgage. We just want to refinance to get out from under the ARM that we are in. The other caveat to this is that our loan in not owned by Freddie or Fannie. What options are there? Why can’t we get refinanced as well? Why options are out there for us? What is Obama doing for those of us who can pay our mortgage but just want to refinance?
By Brandon, August 27, 2009 @ 6:30 pm
President Obama is not a mortgage lender, so he’s not doing much for people who just want to refinance. Nor should we expect him to. It’s not one of the duties of his station.
By Karen, October 7, 2009 @ 4:07 pm
I am upside down. My mortgage was originally $283,000. I currently owe $200,000 but the property is worth $140,000 of no fault of mine but due to the economy and no one will refinance me. Don’t they understand us that keep making our payments are the ones that make the bank the money and they don’t help but yet they help people that cannot help themselves. Is that fair?
By Brandon, October 8, 2009 @ 2:57 pm
No, it’s not fair. But then neither is life. Real estate investments are always a risk. You never know if your value will go up or down. It just comes with the territory.
By Jack, October 22, 2009 @ 8:46 am
We have the same situation. We want to refinance but we can’t because we are upside down on our mortgage. The bank who holds the mortgage says it cannot refinance. We wanted to do short sale but they said they’ll go after our assets. We decided to forclose. But our neighbors are fed up as well. They want national boycott and stop paying mortgage on a month to month basis until someone refinances. They say if we all do it at the same time the banks will have to cave in. We live in California and the housing here will probably never take off again. There is so many empty houses and there is no renters either. What happened to the home owners who left their houses to forclosure? They just dissapeared.
By Adam, October 23, 2009 @ 11:41 am
The banks are forcing good people into foreclosure. I have tried 3 times to have Chase do a loan modification and they keep turning me away. I do not have a hardship. I just want out of a bad loan. 398k interest only loan and the place is now worth 250k. I made a bad decision in the past and there should be a program to help.
By Brandon, October 23, 2009 @ 1:48 pm
How are the banks forcing people into foreclosure? I’m just curious as to what you mean by that. Both legally and technically, it would seem the only person that could force a homeowner into foreclosure was the actual homeowner.
By Jon, October 27, 2009 @ 10:12 am
Brandon, The banks had their “toxic assets” covered by the government. So they have no desire to help the home owner when they were covered regardless. They may not be legally forcing a home owner into foreclosure, however they aren’t going out of their way to stop it.
We need to get the banks off corporate welfare which will force them to work the details out with the home owners in order to survive. I know banks can be quite creative with financing when needed.
By Brandon, October 27, 2009 @ 10:21 am
People often refer to “the banks,” as if they all behave the same way. But this is simply not the case. Some banks made risky loans, while others did not. Some (like most of the big ones) sold assets to the government, while others did not. Some have since repaid their debts to the government. Some banks are willing to do refis, modifications, etc., while others are less willing.
It’s inaccurate and irresponsible to generalize banks, and to say what they will or won’t do across the board. It discourages homeowners from seeking a solution. It never hurts to seek a solution. Tens of thousands of mortgages have been modified over the last 18 months. Thousands of homeowners who were slightly under water were able to refinance under the Making Home Affordable program. These are facts, not conjecture.
Are the odds stacked against the homeowners? Certainly. The lenders hold all the cards in these situations, and they are beholden to nobody. The Bush / Paulson “no-strings-attached” policy gave the banks this unprecedented power. And Obama did his share too. But homeowners still need to make an effort … even if nothing comes from it.
As for the corporate welfare issue, I agree completely. We have entered an age where corporations can privatize the rewards while publicizing the risk. They get the profits, and we help them when they’re in need. The only way it will change is from the ground up, and certainly not from the top down. That’s why I’ve written to my congressmen, and told them that my future votes will be based on their response to this mess. Same goes for the president. If they don’t deliver on their promises, we vote them out of there.
By Jack, October 28, 2009 @ 10:50 am
When we bought our house we had a comfortable payment of 30% . Right now our payment is 52%. We put 20% down, we have fixed rate but higher than we could get today. We have no other debts, excellent credit and savings and other assets. All we want is to lower the interest rate even if only temporary so we can keep our payments at a comfortable level. The government will not help us because we are responsible individuals and only total dead-beats can qualify for government help. The bank won’t help us because it wants our money so it can pay millions $$$ in bonuses. They want us to give them our savings to balance the mortgage. So they can double dip.
By Christina, November 4, 2009 @ 5:27 pm
We are also in the same boat with Chase. We bought this home in 2005. We’ve had 2 previous mortages with Chase in the past & we did good by them, never a late payment. Now here we are upside down, not my fault, we actually bought a home we could afford, not what the banks told us we could afford Thank God! They wont refi us. I actually went down to a chase office today and spoke face to face with a loan officer, I was going crazy over the phone. Had our loan been backed by Fannie or Freddy, which it isnt we would automatically qualify for the HARP program, and I would have left her office with a 2% rate instead of the fixed 6.25 that we have. Whats got me going right now is seeing all these really really beautiful homes selling for less than what we bought our home for. Chase will not modify the principle or do anything at all for us, wont drop the interest rate, nothing. Here we are making our payments on time, we have great credit.I’m wanting to go buy the house I want at todays prices and walk away from this house. I dont know if I have it in me to do that though, but we are thinking about it. The banks need to get on the ball and start doing something for people who actually pay their bills.