Having negative equity, or owing more on your mortgage than your home is currently worth, can be a scary situation to be in. You might be able to improve your circumstances by refinancing your home loan.
How Can Homeowners Wind Up With Negative Equity?
A homeowner can have negative equity, or be “underwater” on a mortgage, if a house loses value due to market fluctuations. The problem can be compounded if the homeowner made a small down payment or took out a home equity loan or a home equity line of credit and then housing prices fell.
If a homeowner doesn’t pay enough on the mortgage each month to cover the interest charges, the principal balance is never reduced and it continues to accumulate interest. The mortgage balance grows and can exceed the value of the house. That scenario is known as negative amortization.
Why Selling Your Home Might Not Be an Option
If you’re underwater on your mortgage, it could be difficult to sell your home. A buyer who needed to take out a mortgage would only be able to borrow an amount based on the current market value of your home, which means you likely wouldn’t be able to sell your house and get enough money to pay off your mortgage.
Refinancing Options for Underwater Homeowners
If you have negative equity, refinancing through a conventional lender could be difficult, since it would be risky for the lender. Some federal programs offer streamlined refinancing options to help homeowners with negative equity.
You might be able to refinance through a program offered by the Federal Housing Administration. It’s not available to all homeowners and not all lenders participate, but it couldn’t hurt to look into it and find out if you’re eligible.
Borrowers who have mortgages through the U.S. Department of Agriculture may be eligible for the Streamlined Assist Refinance Option. Those with mortgages from the Department of Veterans Affairs may be eligible for a refinancing program. Those government programs don’t require a home appraisal and homeowners may be able to add closing costs to the new mortgage amount instead of paying out of pocket.
Fannie Mae offers its borrowers the High Loan-to-Value Refinance Option and Freddie Mac offers the Enhanced Relief Refinance Program. Both are available to borrowers with mortgages that originated on or after October 1, 2017 and that have been in effect at least 15 months. Borrowers may have had no more than one 30-day delinquency in the past year and none in the past six months. The loan-to-value ratio must be at least 97.01% for a single-family house.
Explore Your Refinancing Options
When you bought your house, you expected to build equity, but circumstances beyond your control may have caused your home to lose value. If you’re underwater on your mortgage, you may be able to refinance and improve your financial position. Discuss the specifics of your situation with a mortgage professional.
