5 Secrets to Refinancing an Underwater Mortgage When you purchased your home originally, you may have assumed that you would amass a small fortune in your investment over the years. While it is common for homeowners to benefit from an increase in equity over time, the reality is that some homeowners will deal with property
5 Secrets to Refinancing an Underwater Mortgage
When you purchased your home originally, you may have assumed that you would amass a small fortune in your investment over the years. While it is common for homeowners to benefit from an increase in equity over time, the reality is that some homeowners will deal with property depreciation. The combination of a high loan balance and property depreciation often results in being underwater on your mortgage. This means that you owe more money than what the property is worth. In many cases, homeowners who are underwater on their mortgage can still afford to make their payments, but the question arises about if this is a smart idea. One way to deal with this type of situation is to refinance the mortgage so that the terms are more favorable for you. These five secrets for refinancing an underwater mortgage may help you to proceed along the most intelligent and beneficial path.
Determine If Refinancing Is Right for You
Before you jump headfirst into refinancing plans, you need to carefully analyze this option to determine if it is a smart option to address your situation. You typically can obtain a loan amount that is 80 percent loan-to-value or less based on the current market value. If you crunch the numbers with this scenario, you will likely see that you need to come to the closing table with a healthy sum of money in order to pay off your existing loan. An alternative to this situation is to explore a loan modification or government assistance program to adjust your loan terms. With this type of program, you may not have to physically come out-of-pocket with the additional funds necessary to get back in the black with your mortgage.
Understand Refinance Loan Terms
If you believe that refinancing your underwater mortgage is still a thoughtful idea, you must explore possible loan terms. To qualify for a typical refinance loan program, you will need good credit scores or better. You also may need to prove that you have enough cash available to make up the difference in what is owed on your current mortgage. A few other factors that are typically reviewed by a mortgage lender when you apply for a refinance are your employment and income level. If you plan to qualify for a refinance mortgage, you need to ensure that you meet most lenders’ basic underwriting guidelines. These guidelines vary slightly from lender to lender, but you will find that they are fairly similar in many areas. If you do not meet basic and common underwriting guidelines, you may need to consider other options. For example, an alternative to avoid financial loss is to use a short sale strategy to get out of the home.
Plan to Pay the Difference
You must decide if you want to stay in the home or try to get out from under the mortgage payment. Staying in the home can be financially stressful in some situations. However, staying in the home means that you can potentially protect your credit score and avoid unnecessary moving and legal expenses. If you choose to stay in the home, start funding your mortgage with larger payments each month before you refinance. Otherwise, save additional funds that you can use to pay the difference between the current mortgage balance and the new loan. It may be helpful to get a second job and to use that income for this important purpose. The difference between the loan amounts must be addressed in some way, and paying the difference is a common and reasonable solution. Along those same lines, you can scale back your personal lifestyle to reduce expenses. By doing so, you can potentially have more money available to pay down your mortgage balance. Some common expenses to scale back include your entertainment or extra spending money expense, cable TV, your cell phone plan and more.
Talk to Your Lender
Another idea is to discuss a possible loan modification with your lender. Like refinancing a title loan, some lenders may agree to adjusting the outstanding principal balance to a level that is inline with the property’s market value. There is no guarantee that the lender will grant this request. However, if you are successful with this option, you may notice that your monthly payment decreases to a more reasonable level as well. Typically, with a modified loan, the lender will write off a portion of the debt that is owed. Some homeowners may simply accept the modified loan as their refinanced loan terms. Others may then proceed with a refinance loan application. This could potentially give you access to even better loan terms than the lender-modified loan terms
You may be inclined to act promptly to deal with your mortgage situation, but remember that action may not be needed immediately. Property values rarely ever increase in a straight line. At the present time, property values may be lower than they have been, but you can generally expect values to rise within a reasonable amount of time. Of course, you should plan to live in the property long enough for the value to rise to make this option feasible for you. You can always wait for the property value to increase to a sufficient level before refinancing.
Refinancing an underwater mortgage is a smart idea for some individuals, but it does take strategic planning. Carefully explore all strategies available before you proceed so that you can take the most thoughtful and strategic approach.