Loan Articles

If you are reading this, you must be in a bind. You should not panic – there is a way out of every situation, even your (admittedly) tough one.

Under normal circumstances, you will be allowed to refinance your house, even if it is valued at less than your outstanding obligations, if your credit is good. You will need to roll the difference between the property’s value and the amount of debt into a new loan. This move will be a smart one only if you are offered a substantially lower interest rate on the new loan. You may want to discuss your financial situation and options with a mortgage professional before you make this step.

In fact, the first question one would ask is how you got into this situation in the first place? Financial experts would advise that you avoid risky loans, protect your equity, choose to lock in, and protect your credit. For many, it is too late for this advice.

Let’s say you took out a mortgage and decided to refinance two years later. Keep in mind that the first mortgage was a pretty bad deal, or so it turned out. You got a bad deal because you wanted a new house and financed with the company the constructor recommended. The real estate market slumped in those two years. Thankfully, the value of your house did not slump in this time or at least not considerably. If you have something that is part and parcel of the house but does not add value, like a tennis court or swimming pool, then the total value automatically goes down and you end up owing more than the house is worth.

Why did you get a mortgage to begin with? Prices kept going up, rates kept going down, and people missed getting more favorable deals. The problem is that you assumed the trend would continue, and you might have been misled by an unethical loan officer or agent. The best thing is to avoid refinancing unless you really, really have to. You can modify or renegotiate your loan however you can, but you will only be postponing the inevitable unless your situation has improved permanently – you have gotten a better-paying job, gotten your old one back or worked through the temporary problem that made you go under in the first place. If that is not the case, this is the time to look for a well-paid job, second job, or any of the above.

If you have to choose between defaulting on your mortgage or getting an interest rate modification that improves your debt to income ratio, you would be wise to opt for the latter. Go to your bank and ask for an interest rate modification. However, some people would prefer to get a modification of their principal sum, and the chance of this happening is rather minimal. This will only happen in the event of divorce, disability, death, or other unpleasant things starting with a “d”. From the bank’s perspective, this is even worse than foreclosing. They lose money either way, but by foreclosing they would not lose any more.

So, do not despair – do not forget that negative trends are not endless. Things are already starting to look up on the property market!