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.
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.