Refinancing an Upside Down Mortgage Loan
Upside down mortgage loans can sometimes turn a person’s life upside down, although they need not. If you find yourself stuck with negative equity on your home, or in other words, if the amount you owe your mortgage lender is more than the current market value of your home, you have an upside down mortgage loan. According to a recent MSNBC report, around 700,000 more homeowners in the US found themselves stuck with upside down mortgage loans. According to a recent Las Vegas Review report, 60 percent homeowners in Florida, California, and Nevada have upside down mortgage loans.
You don’t have to panic if you find yourself with an upside down mortgage loan because almost everybody will find themselves with negative equity on their homes if house prices continue to fall as they are doing right now. You are in a jam only if you want to refinance your mortgage or sell your house.
Upside Down Mortgage Explained
As previously mentioned, you can consider yourself having an upside down mortgage loan if the value of your mortgage loan exceeds the current market value of your home, a condition that is also known as negative equity.
For example, imagine that you paid $300,000 for a home in 2005, at a time when prices of houses were rising at a rapid rate. In 2008, the prices of houses began falling and continued falling and you realized that your house is now worth only $150,000, but you still owe your mortgage lender $200,000. This means that you are “underwater” or have an upside down mortgage loan.
Refinancing Upside Down Mortgages
If you have a negative equity on your house, it does not really matter as long as you are willing enough to wait quietly and patiently till the house prices start climbing again.
However, you have a problem if you want to refinance your upside down mortgage. Usually, mortgage lenders approve refinance loan applications only if borrowers have equity on their home. If you have an upside down mortgage, the value of your house is lesser than the amount you owe to your mortgage lender, owing to which your application is bound to get rejected.
This does not mean that homeowners underwater will never get refinancing loans. It all depends on how much they are submerged. If the negative equity on their homes is minute, they might find mortgage lenders willing to extend refinancing loans on their existing mortgage.
Recently, the federal government launched a program called Making Home Affordable, part of which deals with refinancing upside down mortgages. But you are required to get your mortgage refinancing from Fannie Mae or Freddie Mac to avail of this program.
You have hopes as long as you are not over 5 percent underwater; however, the chances of people with very bad negative equity getting refinancing loans are very slim.
Unfortunately, the housing industry has collapsed in a bad way within the United States, and in spite of the government’s Making Home Affordable program, millions are losing their homes.