How to Refinance an Upside-Down Home
Upside-down, or underwater, mortgages describe situations where mortgage debt owed is worth more than the home's actual value. This situation is also described as negative equity. It occurs when home values deteriorate because of weak housing markets. Homeowners look to refinance in order to save interest expense upon fixed loans and the expiration of adjustable rate mortgage "teasers." However, homeowners who are upside-down on their mortgages usually find them difficult, if not impossible, to refinance.
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Things You'll Need
- Internet connection
- Mortgage statement
- Pay stubs
- Tax returns
- Credit card statements
Instructions
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Mortgage Assessment
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1
Review your latest mortgage statement. Take note of the balance owed, as well as your interest rate. Ensure there are no discrepancies regarding your mortgage payment history. You should be current on the mortgage, meaning you have not been more than 30 days overdue over the past twelve months.
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2
Have your home appraised to determine its value. Subtract the value of your home from the balance of your loan to calculate the amount that it is actually upside-down. For example, if your home appraises for $175,000, but you owe $200,000 on the mortgage, the upside-down amount is $25,000. ($200,000 - $175,000 = $25,000)
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3
Calculate the level that your mortgage is upside-down as a percentage. Recognize that refinancing a loan that is more than 25% underwater is nearly impossible to refinance. Using the above example, your mortgage loan is 12.5% underwater, and viable for upside-down refinancing. $25,000 negative equity divided by the $200,000 mortgage balance equals .125, or 12.5%. ($25,000 / $200,000 = .125)
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4
Evaluate your current financial standing. You may simply need to continue making payments, or wait until the housing market turns up, so that you may build home equity before refinancing.
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5
Investigate government incentives offered to lenders to assist distressed homeowners. This information is available at makinghomeaffordable.gov.
Research Government Programs
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Review guidelines for the Federal Home Affordable Refinance program to ensure that you qualify. These guidelines require that you own a 1- to 4-unit home, and carry a mortgage that is current and less than 25% upside-down. Furthermore, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) must own or guarantee your mortgage.
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Contact your mortgage company to verify that Fannie Mae or Freddie Mac guarantees your loan. You may also contact these government-sponsored enterprises to research the information via telephone, or online.
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Gather supporting financial information related to income and debt levels. Recent pay stubs, tax returns, and credit card statements provide this data. Combine this paperwork with any outstanding mortgage information connected to your home.
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Telephone your mortgage servicer to discuss the Home Affordable Refinance application. The mortgage provider will walk you through the refinance process, and is provided financial incentives from the federal government to do so.
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Tips & Warnings
The Making Home Affordable program was started in the aftermath of the 2007-2009 recession and housing crisis. However, a decision to refinance is made by the lender, not the government. You may need a loan modification, rather than refinancing, if you are in danger of foreclosure.
Avoid scams that have emerged to take advantage of desperate homeowners. Scam artists often demand fees, mortgage payments or even deeds to your home in exchange for fraudulent counseling services.
