For homeowners, equity is an important ratio between how much is owed on a home loan and their property's value. Homeowners reach negative or no equity when the amount of the loan exceeds the value of the home.
When home prices plummeted during the recession, millions of Americans found themselves with negative equity and ended up owing more on their mortgage then their home was worth. While many homeowners may want to refinance their mortgage in order to take advantage of lower interest rates and reduce their monthly payments, most lenders require that homes have some value or a percentage of equity.
Fortunately, there are still some options for homeowners who find themselves with no equity.
Refinance options Depending on the equity of a home, there are options to refinance the mortgage. For jumbo loans, refinancing may require equity of at least 10 percent , while other conventional loan refinances might require 5 percent. For those with no equity, this standard can pose a problem.
Fortunately, fewer Americans have negative or no equity now than the in last few years, but there still are some homeowners struggling and in need of refinancing their loan terms.
For those with less than 5 percent home equity, there is the option to refinance through the U.S. Federal Housing Administration or, for eligible veterans, the Department of Veterans Affairs. Both require less home equity, although the FHA generally has a 4 percent standard. For a VA home loan , there is no requirement for home equity in order to refinance, though not every American will be qualified for this type of home loan.
Home Affordable Refinance Program In response to the number of American households that fell underwater during the recession, a new initiative called HARP allows qualified homeowners to refinance with little or no equity. In order to qualify for HARP, borrowers must have mortgages that are guaranteed by Fannie Mae or Freddie Mac and cannot be behind in their payments. As the program is a result of the recession and housing collapse, homeowners are only eligible if their mortgage was sold to Fannie Mae or Freddie Mac before May 31, 2009.
Since its initiation, HARP has helped millions of homeowners refinance their home even after it lost value. For many, this has prevented default and foreclosure by creating more stable and affordable mortgages. As an alternative to conventional refinance options, HARP is specifically for homeowners who have lost significant value in their home as a result of the recession and housing collapse.
Cash-in Another option is to do a cash-in refinance. When homeowners choose a cash-in refinance, they bring money to pay off some of the balance of their loan. By reducing the amount owed on the mortgage, homeowners can shorten the length of the loan. However, with this option monthly mortgage payments are not reduced. Many Americans don't have the cash on hand to pay off a large portion of their loan and therefore choose other alternatives to lower monthly payments. Depending on the size of the loan, homeowners might benefit from paying off a large chunk and bringing the amount down to a conforming loan size. In those cases, it may be possible to reduce monthly payments.
Prepay If the goal is to get better loan terms by reducing the amount of interest a borrower will have to pay, prepaying is a great option. Instead of lower payments, homeowners pay more on their mortgage per month to pay it off faster. Prepaying may reduce the length of the loan and can be more economical for a homeowner who wants to pay less interest in the long run. Prepayment can be done instead of conventional refinancing or in addition.
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