How To Refinance When You Owe More Than Your Home Is Worth

  • what to do when you have negative equity

How To Refinance When You Have Negative Equity. A house can be an excellent investment. In an ideal world, homeowners would profit from the increase in value of their home. The goal is that they will be able to sell it for more than they paid for it, or at the very least for more than they owe on it. Your home equity is the difference between what you owe on the house and what it is presently worth.

To calculate your home equity, simply remove the amount you owe on your mortgage from the value of your home. If your property is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity.

You have positive equity if your home equity is more than zero. Paying down your loan balance or increasing the value of your property are two common ways to increase your equity. However, there’s a danger that your equity will drop and you’ll end up with negative equity.

What Is Negative Equity?

Negative equity occurs when the value of a property falls below the outstanding debt on a mortgage. That you owe more money on your house than it is worth. Although negative equity isn’t always avoidable, knowing why it happens might help you figure out the best strategy to shift the needle back to positive equity.

Underwater Mortgages, Upside-Down Loans And Negative Equity

When it comes to negative equity, lenders, agents, and other real estate professionals utilize a variety of words. The most common phrase you’ll hear is “underwater mortgage,” which is a colloquial term for a homeowner who owes more on their home than it is now worth.

Some individuals confuse the terms “upside-down loan” and “negative equity.” The two expressions, once again, allude to the same circumstance. You have negative equity if your lender notifies you that your mortgage is underwater or upside-down.

What Is The Loan-To-Value Ratio?

The loan-to-value (LTV) ratio is often used to assess lending risk and help a lender decide whether or not to grant credit when someone is acquiring a home. It also impacts a borrower’s interest rate, loan type, and whether or not they will be required to pay for private mortgage insurance.

LTV is a percentage that expresses the relationship between the loan balance and the home’s appraised value. It’s computed by dividing the loan amount by the home’s appraised value.

Let’s imagine you want to buy a $300,000 home and need a $250,000 mortgage to do it. To calculate your LTV, split $250,000 by $300,000, which is 0.83 percent or 83 percent.

The lower the LTV, the more equity you have in your house. The more the LTV, the less equity you have and the greater the risk to lenders. When your LTV exceeds 100%, you have negative equity in your house and are underwater on your loan. How To Refinance When You Have Negative Equity.

What Causes Negative Equity?

Negative equity can be caused by a variety of circumstances, some of which are within your control and others which are beyond your control. Here are some of the reasons of negative equity, as well as some strategies for avoiding or reducing their risk.

Market Decline

This is one of the most common causes of negative equity. They may buy or borrow against their property at the pinnacle of the market, only for the market to crash, causing home prices to collapse.

The market can and has fallen. It’s likely to happen again. But don’t let that stop you from buying. Many schemes now need minimal down payments and stricter standards than in the past. You can’t control the market’s direction, but you can become a better informed borrower.

Educate yourself on the market and where it is headed. Sources of information include real estate professionals. Don’t panic if the market falls. Some actions are mentioned later in this article.

High Interest Loans

High-risk borrowers will pay a higher interest rate than low-risk borrowers. With high-interest loans, the majority of monthly payments go to interest rather than principal.

Some indicators of high-risk borrowers are poor credit score, high LTV, a credit report full of red flags, or unpredictable employment. If you identify with any of these situations, take steps to improve your credit score, prepare for a down payment, or pay off debt.

This will help you qualify for a lower-interest loan and maybe save you money.

Poor Home Condition

A home’s value is influenced by its condition. Allowing your home to fall into disrepair reduces its worth. Maintain your home, make repairs as needed, and improve it when you can.

Small Down Payment

You may protect yourself from market drops by putting more money down on a home. If you buy a house with little or no money down and the market decreases soon after, you’ll have negative equity because you didn’t have much before. Save enough for a higher down payment or look for cheaper properties.

Low Appraisal

A lender cannot loan more than a home’s evaluated value. If the appraisal comes in below the agreed-upon price, the seller may ask you to pay the difference. If you do that, you’re already in the red since you’re overpaying. Instead, negotiate with the seller to get the price down to the appraised worth. If not, you should consider stepping away.

Can You Sell A Home With Negative Equity?

While being underwater on your mortgage won’t stop you from selling your property, you’ll need to cover the gap. The lender will receive $25,000 if your home sells for $200,000 and you owe $225,000 on it.

If you don’t have $25,000 in cash, consider one of these alternatives.

Alternative Solutions

Negative equity doesn’t have to spell the end of the world. Even if things did not go as anticipated when you first bought the house, you may still get back on track or at the very least minimize the load.

Wait It Out

If you have negative equity due to a market decrease, you can make your monthly payments as usual and wait it out. The market will almost always rise again; all you have to do now is decide how long you’re ready to wait.

Make Extra Payments

Make extra payments on the loan in addition to your regular monthly installments if you can. You can choose to apply that extra payment exclusively to the principle balance on most loans. This will result in a smaller balance and a faster increase in equity. Making biweekly payments on your mortgage instead of one monthly payment is an easy way to make one full extra payment on your loan. Simply make half your monthly payment every other week, and you’ll have paid 13 payments instead of 12 at the end of the year.

Rent Your Home

If you can’t sell your house because of negative equity, rent it out until the market recovers or you have positive equity. You might rent out a single room or the entire house if you move into a smaller, more inexpensive space.

Raise the Value of Your Home

One approach to raise your equity in your property is to increase its value. Here are a few ideas for increasing the value of your home:

  • Upgrading your kitchen or bathroom
  • Upgrading old appliances
  • Improving the curb appeal
  • Repairing roof, foundation or plumbing issues
  • Replacing your heating and cooling units
  • Finishing your basement
  • Adding a patio

Making modifications to your property to increase its worth should be affordable and not add to your debt.

Refinancing With Negative Equity

It’s also possible to reduce monthly payments by refinancing your mortgage and eliminating PMI. A refinance may reduce your loan term but boost your monthly payment. Negative equity makes refinancing more difficult. A lender cannot usually loan you more than the home is worth, so you may have to pay the difference yourself.

Final Thoughts

When you owe more on your mortgage than your home is worth, you have negative equity. Falling property values and high-interest loans are two reasons that can contribute to this. It can also be triggered by certain acts taken by a buyer throughout the property purchase process, such as putting down a tiny down payment or paying the difference when an appraisal comes in low.

Negative equity can make selling a property or even refinancing your loan difficult. If you’re underwater on your mortgage, try to reduce the amount you owe by paying down your loan balance or increasing the value of your house. You can chat with a Home Loan Expert right now if you have any mortgage-related questions.

Interested homeowners can learn more, or begin the application process, by calling 888-666-5019 or by visiting HARP on the web.

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