When Your Mortgage Goes Underwater: What to Do
Having an underwater mortgage, or negative equity in your home, can be a challenging situation to navigate. If you owe more on your home than it's worth, selling your home won't bring in any funds, and you may even have to pay extra at closing. Refinancing becomes difficult when your loan balance surpasses your home's value.
So, how does this happen? Negative equity can occur when your home's price drops before you've paid off a substantial portion of your loan. Additionally, taking out a second mortgage can further increase your total debt, minimizing the gap between what you owe and what you own.
If you're struggling to refinance due to an underwater mortgage, there are various solutions at your disposal, including government programs, temporary assistance, and options that enable you to sell your home. For homeowners impacted by COVID-19 and its economic repercussions, specific relief measures have been put in place, which will be elaborated on later in this article.
How to Determine If Your Mortgage Is Underwater
A loan-to-value (LTV) ratio is a key indicator of how much equity you have in your home. If this ratio exceeds 100%, it signifies that your loan balance exceeds your home's market value. To calculate the LTV ratio, divide your loan value by the assessed property value.
For instance, if your loan balance is $150,000 and your home is valued at $300,000, your LTV ratio is 50%. However, if you owe $315,000 on a $300,000 house, your LTV is 105%, indicating that you're underwater.
To address this issue, refinancing may be an option. By swapping your existing loan for a more favorable one, taking advantage of low mortgage rates, or improving other aspects of your loan, you could potentially benefit from refinancing. It's crucial to assess the details, including the breakeven point and the total cost of the new loan, before proceeding.
Exploring Refinancing Options
If you have an FHA loan, you might qualify for the FHA Streamline Refinance program, which allows you to refinance a negative equity mortgage without an appraisal. This eliminates the need for a credit check and ensures that your property value doesn't impact your ability to refinance.
Similarly, Fannie Mae's High LTV Refinance program and Freddie Mac's Enhanced Relief Refinance offer solutions for loans that surpass the ideal loan-to-value ratio. These programs require specific criteria to be met and aim to improve your loan terms, such as lowering your rate or payments.
Another possibility is to pay down your mortgage balance to qualify for a new loan. While this may not be feasible for everyone, keeping your loan-to-value ratio at 80% or lower can help minimize costs and avoid mortgage insurance expenses.
Considering Other Relief Options
If the refinancing options mentioned earlier don't align with your circumstances, there are additional avenues to explore. The CARES Act provides relief measures for borrowers with federally-backed loans, including temporary forbearance of mortgage payments and protection against evictions and foreclosures.
Furthermore, speaking with a HUD-approved mortgage counselor can help you navigate the available options and avoid potential scams. Your lender may also offer additional solutions, such as loan modifications or short sales, to assist you in managing your mortgage payments effectively.
Patience and Perseverance
While dealing with an underwater mortgage can be challenging, it's essential to remain patient and explore all possible avenues for relief. By reaching out to your lender, discussing your options, and potentially waiting for your property value to increase over time, you may find a solution that suits your financial needs.
Remember that various programs and assistance options are available to help homeowners in distress, and taking proactive steps to address your situation can lead to a more secure financial future.
