Home prices can go up or down. Look back at the subprime mortgage crisis and you’ll know the impact declining home values have on homeownership. When your home’s value falls below the mortgage you used to purchase it, you are in negative equity. While a negative equity does not directly lead to foreclosure, it can impair your real estate prospects in the near term.
Negative Equity, Underwater, Upside Down
All three terms refer to the state of owing more on your mortgage than your home’s worth. There are many causes that put a homeowner in such unenviable position.
- Volatile home prices. When you bought your home at a lower price and sell it when the housing market is strong, expect to get a good return out of it. But if you bought it at the peak of home prices and sell it when home prices decline, you are likely to sell the home for less.
- Exotic mortgage products. Option adjustable-rate mortgages and other nontraditional loans of a few years back asked for as little as interest-only payments. This does not reduce the principal but defers its repayment. By making such payments, little or no equity is being built in the home.
- Less down payment. A down payment represents your investment in the home, your equity so to speak. If you put in less, you’d have to borrow more.
- Crisis-affected homes. You might have bought a home in a neighborhood greatly affected by the housing crisis. These housing markets may have the highest number of foreclosures, pushing home prices in such areas down.
If you’re current on your mortgage payments and can afford to continue paying, the negative equity situation may not be a problem. You can wait until such time as your home’s worth can recover and increase its worth. You may have to consult with real estate agents and be up to date on home price trends.
Being in negative equity however becomes a pressing concern when you have:
- to sell the home to buy a larger home or downsize.
- to refinance to lower your current interest rate, convert to a more stable mortgage product, etc.
We can help you find a lender.
Selling an Upside Down Home
It’s really tricky to dispose of a home with an underwater mortgage. You can sell but it means bringing cash to the table to fill the gap between the net sales proceeds and the mortgage balance owed. To close the sale, you have to pay for closing costs and fees.
If bringing in cash at the closing table is out of the question and so is your ability to continue repaying the loan, you can try approaching the lender for a short sale. This means turning the keys to your home in and let the lender sell the home and forgive the rest of the mortgage debt. This will leave a bad mark on your credit report.
Refinancing With Negative Equity
Lenders generally won’t allow you to refinance without equity in your home, 20% is often the standard. What makes things complex is when you’re behind on your mortgage payments. Lenders may have to turn down your refi application.
There are specialized programs however that permit refinancing mortgages with high loan-to-value ratios for as long as they are current and meet their eligibility standards.
Mortgages bought by Fannie Mae and Freddie Mac can turn to HARP® and its successors. The FHA, the VA and the USDA each have their own streamline refinance program for underwater mortgages insured by them.