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Mortgage Refinance Is Finally Possible for Millions of Americans

Dec. 16, 2015
Managing Your Mortgage, Mortgages
Mortgage Refinance Is Finally Possible for Millions of Americans
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It’s likely that something’s quietly been growing in your home: its market value.

If you’re one of the millions of Americans who bought a house in recent years, it’s possible you’ve never had home equity before. Having negative equity or being “underwater” — owing more on your mortgage than your house is worth — has been common since the housing crash of 2008.

But over the past two and half years, the number of underwater homeowners has fallen by more than 7.5 million, according to CoreLogic, a real estate industry research firm. It says that’s a 64% improvement since the beginning of 2012.

It may mean that it’s a good time to refinance, and that you have more options available than you’ve had in years.

Negative equity traps homeowners, slows housing markets

At the worst point of the housing crash, more than one-quarter of homeowners were underwater. Negative equity not only affects homeowners, it also stifles local real estate markets.

A Zillow study of markets with high negative equity rates found that fewer homes were for sale. Owners simply couldn’t afford to put their homes on the market and suffer a loss. The impact was highest on lower-priced homes — the entry-level housing so sought-after by first-time homebuyers. And in cities with a high rate of negative-equity ownership, homes generally took longer to sell, according to Zillow.

But the flood of underwater homeowners is beginning to subside.

Why fewer homeowners are underwater

Some of the decline is a result of lender foreclosures and short sales (the sale of a home for less than what is owed). Combined, there were more than 6 million short sales and completed foreclosures over the past six years, according to CoreLogic.

Also, many homeowners have reworked their loans in order to avoid foreclosure, seeking partial principal forgiveness from lenders, restructuring their loans or tapping government loan modification or refinance programs like the Home Affordable Modification Program or the Home Affordable Refinance Program.

Perhaps even more important has been the healing of the housing market, as home price appreciation has returned — in a very big way in some markets.

CoreLogic says its home price index has gone up 6% over the past 12 months, and the firm forecasts continued appreciation in the coming year. Of course, not every house in every market will appreciate at the same rate. But the analysts at CoreLogic expect home prices nationally to increase 4% to 5% in 2016.

“If every single house in the U.S. appreciated at least 5% over the next year, that in and of itself would lift about 800,000 homeowners who are currently underwater and push them just above so that they have positive equity,” Frank E. Nothaft, chief economist of CoreLogic, tells NerdWallet.

Refinancing and other ways to use your equity

Having just a bit of equity is called “effective” negative equity, meaning you don’t have enough value in your home yet to accomplish much more than breaking even, if that.

But having something around 20% equity in your home — for example owing $240,000 on a home now valued at $300,000 — allows you some flexibility and a few options:

  • Refinance your mortgage. If you bought a home just before the housing crash, your mortgage rate could be north of 6%. This could be a good time to lower your interest rate.
  • Sell your house. Negative equity trapped millions of Americans. Unable to list their home, pay the costs of selling and have enough to pay off their current mortgage, they had to stay put. With a bit of equity in your home, you may finally be able to make that move, maybe to a house you can really afford.
  • Get a home equity line of credit. You don’t have to sell in order to tap that fresh equity in your home. A home equity line of credit can allow you to draw funds, as you need them, for home improvements, repairs, or just about anything. (Here are two good reasons to get a HELOC — and a bunch of reasons not to.)
  • Or do nothing and just enjoy an appreciating asset. Knowing that your home has increased in value, and is likely still building equity, is a great feeling. You don’t have to do anything but enjoy it.

Home refinance options if you’re still underwater

Some markets are still strapped with a large number of negative-equity homeowners. Las Vegas has been on top of the Zillow Negative Equity Report for nearly five years and still has well over 20% of homeowners underwater. Chicago, Atlanta, St. Louis, Baltimore, Kansas City and Cleveland also have significant negative equity ownership.

If you’re still underwater and don’t foresee significant improvement in your situation anytime soon, the HARP and HAMP programs mentioned above may be good alternatives. Other government-sponsored mortgages — such as those found at Fannie Mae, Freddie Mac, the U.S. Department of Veterans Affairs or the U.S. Department of Agriculture — also offer loan solutions for underwater homeowners.

The Federal Housing Administration Refinance for Borrowers With Negative Equity (FHA Short Refinance) is another possibility. The FHA is known for working with first-time homeowners and credit-score challenged borrowers. Its FHA Short Refinance is tailored for borrowers who are still current on their mortgage payments but owe more than their home is worth. It allows your mortgage lender to reduce your unpaid principal by 10% or more.

>> MORE: Tips to reduce your home expenses and maximize your refinance savings

More from NerdWallet:

Hal Bundrick, a certified financial planner, is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @halmbundrick

Image via iStock.