Refinancing with Negative Equity

First, we must understand what home equity is to understand how it can be positive or negative. Home equity is the gap between the fair market vs. the total amount of liens associated with the home.

Example: If a Borrower purchases a home for $100,00 with a 20% down payment and receives a mortgage for the remaining $80,000, the owner has equity of $20,000 in the house. If the market value of the house remains stable over the next two years, and $5,000 of the mortgage payments are applied to the principal of the mortgage, the owner now possesses $25,000 in home equity.

In most cases, we as homeowners can take advantage of our home’s positive equity to pay down other debts or to finance home improvements though financial instruments such as Home Equity Loan (HEL), Home Equity Lines of Credit (HELOC), cash-out refinance or by simply selling the home.

Inversely, as a homeowner, you might find yourself with a negative equity position, if the original value or purchase price of your home has fallen under what your current mortgage’s outstanding balance is. This can happen when borrowers purchase a home just before a housing bubble bursts or the economy falls into a recession.

Borrowers with negative equity do have options. First, with the real estate market being cyclical in most cases, you can just keep paying your mortgage while waiting for the market conditions to improve. Second option, in the past was the government-backed Home Affordable Refinance Program (HARP) that ended in December of 2018. HARP was created because of the housing crisis, and the government since then has created several programs for homeowners facing hard times. These programs allow you to refinance even if you have negative equity or a very high loan-to-value ratio. In most cases, you have to be current on your mortgage. If you start missing payments, it may disqualify you from some of the loan programs.

Best-case scenario if you are going to refinance your home while in a negative equity position you should take the following steps.

  1. Check with lenders you are familiar with to look into a refinance using one of the government’s homeowner assistance programs.
  2. Begin looking at your finances, as you may have to bring cash to close, which for most homeowners is not possible.

For questions, call our mortgage team at 877.312.9033.