Underwater Options for Refinancing a Mortgage

A home appraisal may disclose that you're underwater on your mortgage loan and don't have enough equity to refinance. The term "underwater" refers to owing your lender more than the house's value, and being in this situation can prevent selling or refinancing a home. But rather than wait until your home gains value, consider options for dealing with a depreciated property.

A refinance involves acquiring new financing for a mortgage and completely eradicating an old loan. Homeowners might refinance to take advantage of low mortgage rates. A refinance helps lower home loan payments, and some borrowers can borrow cash against the home's equity and consolidation debt, improve the home or pay for other expenses. Getting a refinancing necessitates having equity in the property -- a minimum of 3 to 20 percent equity.

Not every borrower has cash to write a mortgage lender a huge check. But if you're fortunate to have a large cash savings, you can refinance your underwater home loan and put a down payment on the new mortgage. Let's say your conventional lender denies your refinancing because you only have 15 percent equity. You can pay a 5-percent down payment to reach the required 20 percent equity for conventional mortgage loans and acquire a home loan with a lower rate and payment.

The chances of refinancing an underwater mortgage increase if you're experiencing hardship and risk defaulting on the mortgage. The Making Home Affordable Refinance program offers assistance to borrowers who owe more than the house's value. Verification of financial distress is a criterion for this type of loan. Borrowers must disclose detailed financial information such as gross monthly income and a breakdown of present debts and monthly expenses. Furthermore, the house payment must exceed 31 percent of gross monthly income. There are limits to the Making Home Affordable Refinance program, and borrowers can only refinance up to 125 percent of the property's value.

The faster your home gains equity, the quicker you can refinance your mortgage loan and take advantage of lower rates. You can't control how fast homes appreciate in your neighborhood. However, you can make improvements to your house to help boost your property value. For example, a modern, updated kitchen or bath can add value, as does home additions. Paying more towards your mortgage each month reduces your mortgage balance quicker and helps decrease the gap between what you owe lenders and your home's worth.

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