Can I Refinance if My Home Value Is Less Than the Loan Value?
When your home is worth less than you owe on your loan, you are considered underwater on your mortgage. According to survey data from RealtyTrac, 59 percent of mortgage holders say they would not even entertain the idea of walking away from their home if their loan went underwater. If you want to stay in your home and close the gap between the value of your property and your loan, refinancing might be a viable option.
If you are underwater on your home mortgage, contact your lender. Some banks run their own in-house refinance programs to help borrowers in this situation. Many attempt to qualify homeowners for the president’s Home Affordable Refinance Program (HARP). If your loan is owned or guaranteed by Fannie Mae or Freddie Mac, your lender must assess your eligibility for the program, according to the Making Home Affordable website. While many major–and smaller size–banks do participate in HARP and other Making Home Affordable schemes, they do not have to. Effective Sept. 7, 2010, the Federal Housing Administration (FHA) offers a “short refinance opportunity” for eligible underwater homeowners, HUD reports. The FHA as well as the Department of Veterans Affairs offer other options that might work for underwater borrowers presently invested in one of their products.
Don’t confuse a refinance with a modification. Under a modification, your lender “modifies” the terms of your current loan to make the monthly payment manageable. A refinance actually transitions you out of your present loan to a product with better terms and greater stability.
HARP and the FHA short refinance are open only to mortgage holders who are current on their present loan. As the Making Home Affordable website explains, delinquent borrowers might be better positioned to take advantage of a modification. A refinance can, but doesn’t always, lower your monthly payment. If the interest rate on your underwater mortgage is higher than current rates, you might realize monthly savings. As HARP literature points out, if you are in an interest-only loan or will have a rate adjustment or balloon payment coming in the future, you can save money on interest over the life of your refinanced loan.
In some cases, how deep underwater you are on your loan dictates who can help. With HARP, for instance, your mortgage value cannot be more than 125 percent of the market value of your home. Under the FHA short refinance, there are no limits. Lenders must agree to forgive at least 10 percent of the unpaid balance, bringing the loan-to-value ratio down to no more than 115 percent, states HUD. The new loan, which will be an FHA-insured, fixed-rate product, can have a loan-to-value ratio no higher than 97.75 percent. If you hold an FHA or VA loan at present, you might qualify for a “streamline” refinance, according to HUD and the Department of Veterans Affairs. Often, this technique allows for refinancing without an appraisal. While this likely will not change your loan-to-value ratio, it can get you into a product with more favorable terms as you wait for housing prices in your area to rebound.
Options other than a refinance or modification exist for underwater homeowners. Making Home Affordable, for example, uses the Home Affordable Foreclosure Alternatives Program (HAFA) for loan holders who do not qualify for the two aforementioned plans. Under HAFA, you may be able execute a short sale or deed-in-lieu of foreclosure. Lenders allow homeowners to sell their property for less than the value of their loan, while forgiving the difference, under a short sale. With a deed-in-lieu of foreclosure, the Making Home Affordable website notes that borrowers “voluntarily” hand over the deed of their house to their bank and then walk away, scot-free.
About the Author
As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals Environment Behavior and Health and Place. Pendola has a Bachelor of Arts in urban studies from San Francisco State University.