Should I Refinance an Upside Down Mortgage Into an ARM?
Sometimes after you have purchased a property, the property will lose some of its value due to damage to the house or to a decline in the real estate market. In such an instance, you may face a number of financial difficulties. If you are unable to afford your monthly mortgage payment, you may wish to refinance to a mortgage with a smaller monthly payment. However, this can be tricky.
Other People Are Reading
-
Upside Down Mortgages
-
An "upside down" mortgage is a mortgage on which someone owes more than the total value of the house. For example, if someone takes out a mortgage on a house for $150,000 and the house then quickly declines in value to $100,000, the mortgage would be upside down by about $50,000. Lenders may be wary of issuing a new loan to a person who has an underwater mortgage because the collateral of the home won't cover the size of the loan.
Refinancing
-
If you are in a fixed-rate mortgage, you may wish to refinance into an adjustable rate mortgage, or ARM, if you believe that a floating interest rate would save you money. However, this may not be possible if you have a mortgage that is underwater. A lender may not be willing to refinance the loan at any rate, because if you default, the lender will be out the difference between the size of the loan and the home's value.
-
Cash Payments
-
Sometimes a lender will only be willing to refinance an underwater mortgage if you are willing to make up the difference in the price of the home and the size of the mortgage. So if your home were valued at $100,000 and you were seeking to refinance for $125,000, the lender may ask you to put up $25,000 to cover the difference between the size of the loan and the value.
Modifications
-
In lieu of refinancing into an adjustable rate mortgage, you may wish to approach your current lender and see if the bank will modify your current loan. The lender may be willing to lower the interest rate, thus lowering the size of your interest payments, to help you stay in your current home. In addition, modifying a loan instead of refinancing is generally cheaper.
-
