You may be able to refinance your mortgage if the balance is more than the house is worth. But be prepared to add cash to the deal out of your own pocket. Bankrate.com reports that a lender simply isn't going to refinance your mortgage while you are upside down. Upside down means you owe more than the house is worth. Refinancing a mortgage like that puts the lender at risk because there isn't any equity present to serve as collateral for the loan. You'll have to put money into the deal to create an equity level of at least 10 percent before the lender will refinance, according to Bankrate.
Property Values
Declining property values can lead to a mortgage becoming upside down. A recession coupled with a housing crisis can dramatically drive down property values, causing homes to lose tens of thousands of dollars in value. That can lead to the owner owing more on the house than it is worth, especially if the home was originally purchased with a low down payment. The lack of a significant down payment makes a property vulnerable to falling market prices.
Increasing Equity
As the owner of the property you can create equity by paying down the mortgage balance. Example: The balance on the mortgage is $220,000, but a licensed appraiser reports that it is worth just $200,000. You want to refinance but the lender is asking you to pay $40,000 at the closing to bring the mortgage down to $180,000. That's $20,000 less than the value of the property, creating an equity position of 10 percent.
Evaluating The Deal
It's up to you to decide if its worth it to add cash to a refinancing. It all depends on the terms of your current mortgage versus the terms of a potential new mortgage. Paying down the mortgage may make sense if you plan to remain in the house for a very long time or even for the rest of your life. The refinancing will make the payments more affordable and will remain the same through the life of the loan if you take out a fixed-rate mortgage. On the other hand, putting more money into the house may not be wise if you really want to sell and are counting on property values rebounding in the next few years. Under that scenario, you may choose to wait a while on the refinancing. Your accountant or financial advisor can help determine the best move for your situation.
Foreclosure
Bankrate reports that some people choose to get tough with the mortgage company when negotiating for a new loan. Bankrate reports that some people threaten to walk away from the home in a voluntary foreclosure if the lender refuses to approve the loan because the mortgage is upside down. According to Bankrate, banks generally stand their ground, and the result is often a foreclosure that hurts both the bank and the consumer. The bank gets a house it doesn't want and the former owner is hit with a foreclosure that will remain on his credit reports for seven years.
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