Negative Equity Refinance Options

Mortgages are secured loans, which means that the lender places a lien on your home, enabling it to foreclose if you do not pay back the debt. If your loan amount exceeds the property value, you have negative equity. Lenders typically do not allow you to take out negative equity loans or refinance loans because such loans are partially unsecured due to the loan balance exceeding the market value of your home. However, in certain situations, you can take out a refinance loan even if you have negative equity.

Prior to the recession that began in late 2007, some lenders allowed borrowers to take out negative equity loans. Many homeowners took out loans that amounted to 105 or 110 percent of the value of the property being financed. Although this meant these loans were partially unsecured, property prices were rising rapidly and lenders assumed that the future value of the home would exceed the mortgage balance. However, home prices began to fall in many parts of the country in 2007, and this meant that the negative equity in these properties actually increased. As a result of this, few if any lenders now proactively offer these loans.

Aside from the property owners who took out negative equity loans, many homeowners who made significant down payments found themselves with negative equity as a result of falling home prices. Many of these people had variable rate loans but could not refinance into fixed rate loans due to this negative equity. The federal government intervened in 2009, when it launched the Making Home Affordable Program. The program was designed to offer refinance solutions and loan modifications to people with negative equity and homeowners who were facing foreclosure. Government-sponsored enterprises Fannie Mae and Freddie Mac bought the majority of the first lien loans written in the United States, and these entities both opted to take part in this program.

Since 2009, the MHAP has evolved and, as of 2011, both Fannie Mae and Freddie Mac are enabling homeowners to refinance under a sub-section of MHAP called the Home Affordable Refinance Program. You can refinance a variable rate loan into a fixed rate loan with a minimum term of 20 years as long as your loan amount does not exceed 125 percent of your property value. You can refinance first lien loans secured by a primary residence but only if you are not more than 60 days late on your loan payments.

Not everyone can qualify for HAMP because of the loan-to-value restrictions and the other eligibility guidelines. If you cannot qualify for HAMP, you can ask your lender to modify your existing loan. Some lenders have helped struggling homeowners by extending loan terms or reducing principal. If you can afford your current loan, your lender has no incentive to modify the debt but they may agree to modify your loan if doing so reduces the likelihood of your home going into foreclosure. However, even in times of severe recession, loan modifications and negative equity refinance loans are not always readily accessible.

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