Negative Equity Mortgage: What Refinance Options Do I Have?

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As a homeowner, you might find your self with a negative equity mortgage if the original value of your home is currently worth less than your mortgage loan's outstanding balance. This can happen when people buy homes just before a housing bubble bursts or the economy falls into a recession, for example.

Although you could just keep paying your mortgage while waiting for the market to improve, you might also have a chance to refinance and improve your mortgage situation. One option, the government-backed Home Affordable Refinance Program (HARP), has been extended through December 31, 2018.

Negative Equity Mortgage: What Are My Options?

Many homeowners with negative equity would like to refinance, but their home, along with seemingly everybody else’s, is worth less than it used to be. Perhaps you've approached a few banks to refinance your home, but they've said your loan-to-value (LTV) ratio is too high. In other words, your home's mortgage loan is too large a percentage of your home's current appraised value, or actually exceeds it. Fortunately, you still have a few options. 

It is possible to refinance a negative, or "underwater" mortgage, although it’s not necessarily easy. You have two choices:

  • Try to refinance using one of the government’s homeowner assistance programs. 
  • Bring cash to closing, which is not feasible for most homeowners.

As a result of the housing crisis, the government has created several programs for homeowners facing hard times. These programs allow you to refinance even if you have negative equity or a very high LTV ratio. In most cases, you have to be current on your mortgage. If you start missing payments, it may disqualify you from some of the loan programs.

Refinancing Programs

Which refinancing program should you use? It depends on how you got your mortgage loan, or more specifically, it depends who currently owns your loan. 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 program is the only option for refinancing these loans.

If your mortgage isn't backed by Fannie Mae or Freddie Mac, you can investigate the various other refinancing programs available for low or no-equity refinancing, such as the FHA Streamlined or VA Streamlined loan refinance programs. In many cases these programs have no LTV requirement and don't require a new appraisal, so the loan's based on your home's previous value, which can make all the difference.

Another Option: Paying Down the Mortgage

There’s one other way to refinance with negative equity, and that’s to pay cash to bring your loan value down, closer to your home's current value. You'll reduce the amount you owe by either making a large payment on your loan or by paying the cash at closing when you refinance.

Your ​​property's high LTV ratio ​is likely what has prevented you from getting refinancing from a traditional lender. If you have a negative equity loan, you’re borrowing more than the home is worth, and most lenders don’t want to take that kind of risk.

If you default on the loan, the lender won’t be able to get fully repaid, even if they sell your home. As a result, many lenders only offer to refinance if you pay down the loan balance to create a more palatable loan-to-value ratio or wait until your home’s market value goes back up, improving its loan-to-value ratio.

Unfortunately, this approach requires that you have access to a lump sum of cash. If you aren’t in a position to write a large check, government refinancing programs may be your only option. The HARP program urges homeowners to apply again, even if they've been turned down before so it's worth taking that extra step.

If you’ve exhausted all loan options and still can't 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 have the borrower default or abandon their payments. Inquire about changing the terms of your loan to see if your lender has any other solutions to help you stay current on your mortgage.