Yale Roth M.A., M.Ed

Is Your Home Underwater?

I get this mortgage refinance question a lot!  Here it is: “What Do I Do If I Owe More On My Mortgage Than What My Home Is Worth?”

This mortgage question is commonplace now as there are a number of homeowners who owe more on their mortgage than what their home is worth.

So what are the homeowners’ options?

Here are the answers.

1.  Pay your mortgage down so you have equity in your home and you’ll qualify for a conventional mortgage refinance. You’ll need to have at least 3.5% equity in your home to qualify for a FHA mortgage refinance and 5% to qualify for a conventional mortgage refinance.

Here’s the issue with that solution.

Most people don’t have thousands of dollars laying around to pay down on their mortgage when their property value is lower than what they owe.  This is taking good cash that has present day value and putting it against a non-performing asset – the home.

If it’s a small amount that you would need to pay down on the mortgage, then you may want to consider it; otherwise, forget about it.

2. Apply for a HARP Home Affordability Refinance Program loan.

HARP is a new mortgage refinance program that allows homeowners who currently owe more than their property’s value to refinance into a lower mortgage rate.

There are guidelines for HARP and some homeowners may not qualify.

This is the first option I would recommend exploring if your mortgage balance is more than your home’s appraised value.

3. Contact your mortgage company and ask them if you qualify for a mortgage modification.  Similar to the HARP mortgage refinance program, you have to qualify for a mortgage modification.  The mortgage modification can reduce your mortgage rate and mortgage payment.

4. Do nothing.  Just continue to make your mortgage payments and wait until you home value increases.

5. Sell your home in a “short sale.”  This means that you are selling your home for less than your existing mortgage balance.  Your mortgage company will have to agree to the short sale price.

6. Walk away.  Believe it or not, there are a lot of homeowners who considering this option.

It’s called in some circles a “strategic default.”

Here’s how it works.  You’ve analyzed your options.  You may not qualify for the HARP program or you may not be eligible for a mortgage modification or you don’t want to take – say $30,000 – out of your savings to pay your mortgage down so you can qualify for a conventional refinance or you’re unable to sell your home so you can’t do a short sale.  So what do some homeowners do?  They walk away.

In conclusion, there are options available to reduce your mortgage rate and mortgage payment if you owe more than your home is worth.  You want to explore all the options and determine which will benefit you most.

Related Posts:

• Why HARP 2.0 Might Be Right For You
• 3 Ways To Lower Your Mortgage Rate
• Mortgage Refinance Questions – HARP? Is It For You?
• Mortgage Questions – “Is A 30 Year Fixed Mortgage Better Than A 15 Year Fixed Mortgage?”
• Mortgage Refinance Questions – Do You Need To Drop Your Mortgage Rate By 1% To Justify Refinancing?