Refinancing Upside Down Mortgages

By Sean A. Kelly

Refinancing your existing mortgage can be intimidating enough even when the market price for your home is well above the amount of your mortgage. You might find it even more daunting when you are trying to refinance upside down mortgages. What is an upside down mortgage?

An upside down mortgage is when the current market value of your home is much lower than the amount of your current mortgage. For example, five years ago you bought a house for $300,000.00 and put a down payment of $50,000.00. You took up a loan for $250,000.00 to pay on the balance of the house. However, after five years you find that the current market price for your home now is only $120,000.00 but, you still owe your lenders $200,000.00. If you encounter this situation, it is when your mortgage is upside down.

Refinancing upside down mortgages may pose quite a challenge but it is not entirely impossible. When the market price of your home is significantly lower than the balance of your loan, your home will have negative equity as you owe your lender more than the home is actually worth. In order to approve a refinancing loan, lenders generally will require a certain amount of equity in your home. So the chances of your application being approved by lenders are very slim.

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Under certain circumstances, you might be eligible for refinancing assistance, especially now that the Federal Government has announced the ‘Making Home Affordable’ program that is partly designed to provide refinancing assistance to homeowners with upside down home mortgages. However, you might want to check with your lenders.

To see if you may actually still qualify for a mortgage refinance even when your mortgage is upside down, you might want to evaluate the total extent of your upside down mortgage. The rule of the thumb is that you may not be upside down in your loan by more than 5%. If you find that your mortgage is upside down by more than 5%, you might have a more difficult time to find any mortgage provider that may be willing to refinance. You will fall under the high-risk category. Especially now, in the current economic situation, few lenders may be willing to take the risk of refinancing an upside down mortgage with a percentage of higher than 5%.

You may also check the current interest rates first, even if your mortgage is only upside down by less than 5% because, there might be a chance that you are actually paying a lower rate now than if you refinanced. There are also the costs involved with refinancing that you might want to consider before deciding. These costs will inadvertently add to the amount of money you might have to spend if you decide to refinance. So in the long run you might actually end up having to pay more than if you had stuck with your current mortgage.

If you really insist on having your upside down mortgage refinanced, you may contact the Federal Housing Administration (FHA) to assist you in refinancing your home. Normally, the FHA might allow you to get a second mortgage on your home for the difference between the current market price of your home and the amount that you owe. This gives you the option of refinancing your home with another lender at the current value of your home and the FHA may give you a loan worth the difference of what you owe your lenders.

It is advisable that you consult with a professional to get the best advice on how to handle your particular financial situation before resorting to refinancing an upside down mortgage.

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