Is your property worth less than the amount of money you owe on your home? If this is the case, you have what’s known as an underwater mortgage. This can be a huge hassle for homeowners – especially if you’re wanting to refinance your property.
Read on to find out if your mortgage is underwater and what your options for refinancing are. If you find yourself with an underwater mortgage and you aren’t sure what path to pursue, reach out to us! Our experts are thoroughly versed in underwater mortgages, and we can help you figure out your options.
A Closer Look at Underwater Mortgages – How It Can Happen
Any kind of loan can go underwater (and they can also be referred to as upside-down loans). Motorcycle, automobile, and boat loans can all go underwater just like a mortgage can. Let’s look at an example of a mortgage that went underwater.
Say you wanted to buy a home for the price of $1m and you have $200,000 to put down. The bank requires an appraisal of the home’s value, and the appraiser determines it to be $1m. Thus, since you are putting $200,000 down, the bank is willing to give you an $800,000 loan.
A few years down the road, you see that your neighbors are having a hard time selling their homes. Due to a decrease in property values in the surrounding area, your home is only worth about $600,000 – yet, there is still $960,000 left on your mortgage. At this point, your mortgage is underwater.
Another way for your mortgage to go underwater is through missed payments. If you fail to pay your interest one time, that interest will then start accumulating interest. Compounding interest could cause your mortgage to go underwater.
Now, before we go further, we want to bring your attention to the disruption in the real estate market due to COVID-19. If you find yourself unable to make your mortgage payments (whether or not your mortgage is underwater), foreclosure proceedings cannot be initiated for the time being. Governor Cuomo mandated a foreclosure and eviction moratorium in March of 2020; since then, it has been extended twice and likely will continue to be extended well into 2021.
How to Know if You’re Underwater On Your Home
Are you unsure whether your mortgage is underwater? Here are signs that point to it:
- Local property values are falling.
- You receive a lower appraisal of your home than what remains on your loan balance.
- You have fallen behind on your monthly mortgage payments.
When Does It Make Sense to Refinance an Underwater Mortgage?
You may be wondering if anyone will refinance an underwater mortgage. In some cases, yes – and it may be a good path to pursue. Interest rates have reached an all-time low over the last few years, making now a better time than ever to refinance a higher interest rate loan.
However, refinancing a mortgage that’s underwater can be difficult – especially if you are trying to refinance an underwater private or second mortgage. Furthermore, refinancing your mortgage loan could lower your credit score – however, the money you save through more affordable interest rates will typically outweigh the negative impact of a credit dip.
What Are Your Options if Your Mortgage Is Underwater?
● Refinance Your Mortgage. If you don’t want to go through traditional refinancing channels, see if you are eligible to receive HARP assistance. The federal government started the Home Affordable Refinance Program (HARP) to let homeowners refinance underwater mortgages. Unlike the usual refinancing methods, HARP lets you refinance your home in a faster, more streamlined way. In most cases, no appraisal will be required – thus, reducing closing costs that are usually associated with refinancing.
● Sell Your House. Ideally, you should hold off on selling until the local market improves. However, if you have to move sooner and you own other sellable assets, you can use that to pay off the difference between the house sale and your remaining mortgage balance. In this case, you would not need your lender’s permission to sell, as long as you would be able to pay off the full mortgage amount owed.
● Declare Bankruptcy. If you find yourself deeply in debt and with no way to pay off your mortgage, declaring bankruptcy could be a resort to turn to. Chapter 7 bankruptcy can delay foreclosure proceedings while you get yourself above-water, and Chapter 13 bankruptcy gives you the chance to set up a repayment plan for debts.
Can You Underwater-Proof Your Mortgage?
Since a mortgage can go underwater depending on fluctuating house values, it may seem as if you have no control over the matter. However, there are ways that you can mitigate risks. For instance, when possible, pay off more of your mortgage. If you get a yearly bonus, consider putting some of that towards your mortgage – so if things go sour, you have a financial buffer. Furthermore, having a larger down payment could protect you from swings in value.
What if I Can’t Refinance?
There are federal programs that have been designed to assist underwater borrowers who are in financial distress – for instance, the aforementioned HARP can make this a possibility. Yet, not all homeowners are eligible for underwater mortgage relief.
With HARP, the mortgage must have originated before May 31, 2009, and you can’t have had more than one late payment on your account record within the last year. But if your underwater mortgage is not eligible for HARP, don’t panic. If you need assistance finding a refinance option for underwater mortgage, fill out our contact form for a free consultation. We’d be happy to discuss your options.