Negative Equity Mortgage: Can I Still Refinance My Home?

2 Ways You Can Refinance Your Mortgage, Even With Negative Equity

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A negative equity mortgage occurs in cases when 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 in with a great question. It went something like this:

"I’d like to refinance, but my home (along with everybody else’s) is worth less than it used to be. They say my loan to value ratio is too high.

Is there any way to refinance with negative equity?"

It is possible to refinance an underwater mortgage, but it’s not easy. You have two options:

  • First, you can try to refinance using one of the government’s homeowner assistance programs. 
  • Or you can bring cash to closing, which is not feasible for most homeowners.

As a result of the housing crisis, the government created several programs for homeowners facing hard times. These programs allow you to refinance even if you have negative equity. In most cases, you have to be current on your mortgage — if you start missing payments it can hurt your chances.

Which refinancing program should you use? It depends on how you got your mortgage loan (or, to be more specific, it depends 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’ve never heard of those organizations — so the HARP 2.0 program is their only option.

For other mortgages, read up on the various refinancing programs available.

Where to Begin: Pay down the Mortgage

There’s really only one other way to refinance with negative equity, and that’s to pay cash. 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’re borrowing versus the total value of your home. In a negative equity situation, you’re borrowing more than the home is worth, and most lenders don’t want to take that kind of risk. If things go sour, they won’t get repaid — even if they sell your home. As a result, they’ll only offer refinancing if you pay down the loan balance (or if your home’s value goes back up).

Unfortunately, this approach requires that you have access to a lump sum of cash. Most homeowners aren’t in a position to write a large check, so the government refinancing programs listed above are their only option.

If you’re 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 to have the borrower default or abandon their payments. Inquire about changing the terms of your loan to see if anything else can be done.