If you owe more on your mortgage than your house is currently worth, you’re underwater. You can find yourself in that situation because you missed payments or because property values in your area have declined and your home’s market value is less than it used to be.
Having equity can give you options if you need money for home improvements, credit card bills or a child’s college education. Not having equity can make it difficult to cover those types of expenses. A lack of equity can also make it hard to sell your house and pay off your loan.
If you’re underwater on your mortgage, you might be thinking about refinancing so you can get a lower interest rate, pay down your principal balance faster and build equity. Refinancing might only be possible in limited circumstances, and even if you can refinance, it’s not necessarily your best option.
When You Might Be Able to Refinance an Underwater Mortgage
Lenders generally require homeowners to have a minimum percentage of equity to refinance a home loan. If you don’t have any equity and you have a conventional mortgage, you’ll have a hard time getting a lender to approve your request to refinance.
If you have an FHA or USDA loan, you might be able to refinance. Those agencies have less strict guidelines.
Other Things You Can Do
Even if you can refinance, that might not be the right solution. Refinancing can lower your monthly payments, but you’ll have to pay thousands of dollars in closing costs. If you’re not going to live in your house much longer, you might not save enough to break even.
If you intend to move in the near future, you can ask your lender to approve a short sale. If it agrees, you’ll be able to sell the house for less than the amount you owe on your mortgage. You may or may not be required to pay the difference. A short sale can have a negative impact on your credit, but not as much as a foreclosure.
If you’re struggling to keep up with your monthly payments, but you want to stay in your home, you can request a loan modification. Your lender might agree to reduce the amount you owe in principal so you will no longer be underwater.
Why Staying the Course Might Be Your Best Option
Not having equity is less than desirable, but it might not be a problem that you have to do anything to solve. Often, homeowners end up underwater on their mortgages because housing prices in their area have fallen across the board. If you intend to stay in your house for the foreseeable future and you don’t want to take out a home equity loan or line of credit, you can simply keep paying your mortgage and wait for the housing market to rebound and your home’s value to rise.
