What are Underwater Mortgages?

twitter size - bigstock-Home-floating-on-a-life-preser-55899590 underwater homeWhen a mortgage is underwater, it means the homeowner owes more on the mortgage than the home is currently worth. Being underwater in your mortgage is frustrating, because it means you have negative equity in your home. The more equity you have in your home, the more money you have “saved up” in the investment.

Let’s use an example to illustrate. Let’s say you bought a house four years ago for $150,000. And let’s say you currently still owe $140,000. Unfortunately, home values in your area went down about a year ago, and your home is now only valued at $135,000.

Since you owe $140,000, you are underwater by $5,000. Or, you have -$5,000 in equity. If you were to try to sell your home in this situation, you would inevitably have to take a loss. Likewise, it would be very difficult to qualify for a conventional refinance loan, since you have negative equity. However, you may be able to qualify for a HARP refinance, if your mortgage is owned by Fannie Mae or Freddie Mac.

If you find yourself in an underwater mortgage situation, don’t panic. You’re not alone. And truth be told, it doesn’t have to be the end of the world. There are a few things you can try to do to help the situation.

What you can do if you’re underwater in your mortgage:

Try to refinance through the Home Affordable Refinance Program (HARP). Note that this program is only available to homeowners with mortgages owned by Fannie Mae or Freddie Mac. If you qualify, you can refinance to today’s low mortgage rates even if you’re underwater. The benefit to doing this is to lower your interest rate, thus lowering your monthly payment, making it more affordable to own your home.

Try to make improvements to your home to increase its market value. If you’re only underwater by a small amount, this could be easier than you think. A few light renovations or upgrades could go a long way to improving your home’s value.

Make more aggressive payments to lower your mortgage balance. Use this strategy with caution, especially if you’re on a tight budget. Only make pre-payments if you can comfortably afford to do so and make sure the type of mortgage you have does not penalize pre-payments. Also, make sure that when you do make pre-payments, the money is being applied to your principal balance – not your interest. The way to build equity is to lower your principal balance.

We can help.

If you have any questions about your mortgage, don’t hesitate to reach out to your loan officer. If you’re looking for more information, Mid America Mortgage has licensed loan professionals in locations across the country. If you would like to speak with someone right away, call (866) 544-7013.

If you’re eligible for HARP refinancing, please keep Mid America Mortgage in mind when shopping around for rates. We’d be happy to talk to you about your situation and offer you a free, no obligation rate quote. Simply give us a call or submit your information online and one of our loan professionals will contact you.

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