What Should I Owe More Than My House Is Worth to Refinance?

Piling extra debt onto a mortgage, or taking the wrong kind of loan to start with, can land a homeowner upside down to his mortgageowing more than the home is worth. In the housing boom which led up into the housing bust of 2008, home prices rose sharply. Confident in the current market, some homeowners took out cash when they refinanced. Others couldn’t resist the lure of easy credit and signed up for houses with little or no down payments.

Who Gets Underwater

Homeowners that make required payments each month, on time, can nevertheless get underwater on a mortgage. In a zero- or 5-percent-down mortgage, any downturn in home costs might instantly turn into the loan upside down. Option ARM loans that enable an owner to create quite low monthly payments–apparently in order to create a mortgage more affordable–can wind up placing a homeowner submerged, causing her to sink deeper with each payment. Since the very low minimum payments don’t pay the interest due every month, the total amount owed really increases, rather than decreases.


Homeowners that owe more about a home than the amount it now appraises for may find their options limited when they want to refinance. Being submerged is particularly significant for option ARM mortgage holders who want to swap the variable-rate loan out for a fixed-rate mortgage before monthly payments grow. They may find themselves trapped–unable to manage extreme payment increases when loan rates reset, and unable to refinance if banks refuse to take care of underwater owners. Normally, lenders will not refinance mortgages on which the amount owed, compared to the home value, exceeds 80 percent.

Possible Solutions

Homeowners may try to renegotiate the conditions, payments or principal owed in a submerged mortgage. Lenders differ in willingness to correct existing loans, and usually the homeowner must be late in making monthly payments to get your lender to listen. Those homeowners that have a little additional cash on hand can attempt to negotiate with a cash-in refinance. They invest in a transaction, bringing the commission owed on a home in exchange for a fixed rate or lower interest-rate loan. When occupation changes force a homeowner to relocate, she could either rent out the house or attempt a short sale. A short sale is a transaction in which the lender allows the homeowner to market a home for less than she owes it. Financially stable homeowners who owe more about the home than it is currently worth may also decide to keep living in the home and ignore the cyclical home market.

Deed-in-Lieu/Last Resort

Those homeowners who cannot refinance, cannot make payments and have not been able to market can write to the creditor and request that a deed-in lieu of foreclosure transaction (DIL). The distressed homeowner gives up possession of the house to the creditor, and in exchange, the creditor subsequently releases the borrower in the mortgage contract and also additional accountability. Deed-in-lieu agreements get the homeowner out of obligations fast, and with less harm to charge scores than foreclosure triggers. Since homeowners need to promise to maintain a property in a DIL transaction, the creditors avoid the headache of damaged or gutted properties common in foreclosures. Although being submerged makes DIL agreements unpalatable for creditors, sometimes they consent to them in order to avoid foreclosure proceedings.


Some underwater homeowners fixate on lower home costs and dread that home values will never go up, but property markets tend to be cyclical; remaining place might be less costly than purchasing short and moving out. Frustrated owners that believe only walking away from a submerged property need to research potential long-term credit and legal repercussions from doing so.

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