Can You Refinance Your Home if You Owe as Much as It's Worth?
When you refinance your home it is sort of like having a fresh start on the loan. If your financial situation has improved or economic factors are positively affecting mortgage rates, it presents an opportunity to make lower monthly payments, get better interest rates and in some cases lower the total cost of the loan. But in order to refinance you must first look at how much you owe and how much the home is worth.
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Loan to Value
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When evaluating an application for a home mortgage, the lender looks at a number of factors. One is the borrower's credit score and another is his current income. The qualification process is similar to applying for a new purchase loan. The lender also looks at the loan to value ratio. This is the amount of the existing balance divided by the current market value of the home times 100. So for instance, if the home loan balance is $115,000 and the current market value is $150,000, the LTV is about 77 percent.
Owe What It's Worth
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The chances that a lender will consider a refinancing application if the current mortgage balance is equal to or close to the house value are slim. This indicates an LTV of or close to 100 percent. The ideal LTV most lenders prefer to approve a refinancing application is about 80 percent, though some will allow a higher percentage. Also, when the borrower owes what the house is worth, refinancing does not offer the same benefits to the borrower as it would if he had equity in the home. For instance, the borrower cannot take cash out on the loan and might have to pay the closing costs out of his own pocket.
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Considerations
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If the home value continues to equal the loan balance after an extended period of time, that means that the home isn't growing in value or is losing value. It could be due to a slumping housing market or other factors. This is a time when a homeowner must make hard decisions on whether it is best to sell the home and look for a better investment or hold on to the property in hopes that prices will rise in the future. An experienced real estate agent or financial adviser can provide personal advice on this matter.
Alternative
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If the reason for wanting to refinance is a financial hardship, the lender might consider processing a loan modification instead. Unlike a refinancing, a modification is often temporary. The borrower must submit proof of his hardship and negotiate new terms with the existing lender. A real estate attorney or credit counselor can assist with this process.
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