Are you in a position where falling home values dropped the market value of your house below the outstanding amount of your mortgage? In this case, your home is said to be "underwater."
If you can continue to make payments and ride out the economy until the value of your home rises, you may be okay – but the currently low interest rates will probably not stay that way, and refinancing later may be expensive. With a current LTV (loan to value) ratio greater than 100%, most lenders will consider you too risky for refinancing.
Is there an option? There is, at least through September 2017. It is the Home Affordable Refinance Program (HARP).
The program was established to reward homeowners who have kept current on their payments yet ended up underwater. If you qualify for HARP, you may be able to refinance with better loan terms and interest rates than your LTV would normally allow.
Aside from having a good payment history (no missed payments in the prior twelve months), you need to meet three criteria to qualify for HARP.
- Mortgage Holder – The mortgage must be held by Freddie Mac or Fannie Mae, and it must have been in their possession prior to June 1st, 2009. If you are not sure who holds the loan, contact your mortgage company or check online. Links can be found on the HARP website or at harp.gov.
- LTV Ratio – You do not have to be completely underwater, but you must have an LTV ratio greater than 80%.
- First HARP Refinancing – Unless it was refinanced between March 1st and May 31st, 2009, the mortgage cannot have been previously HARP-refinanced.
The HARP program is currently scheduled to end on September 30th, 2017, so if you plan to refinance through HARP, do so soon.
Not all lenders handle HARP refinancing. If your lender does not cover HARP, see if your lender will work with you. Since you have a good history with repayments, they may be willing to cut you some slack as the market eases in order to keep your business.
If you do not qualify for HARP because of missed payments and potential foreclosure, you could consider the Home Affordable Modification Program (HAMP). If you meet the qualifications of financial hardship, your lender will try to modify your loan to drop your monthly payment, which could include expanding the term, reducing the interest rate, or changing the loan type. You do have to show proof that you can pay the modified terms – which is not easy if you are currently missing payments and nearing foreclosure.
The Mortgage Forgiveness Tax Relief Act of 2015 has taken care of another potential concern. Usually, if refinancing results in a reduction of your debt, that amount is considered as taxable income. This could be a substantial amount if you are refinancing an underwater home. However, the Mortgage Forgiveness Tax Relief Act waives taxes on debt forgiveness up to $2 million through 2016.
HARP has typical refinancing costs at closing. You also need to consider these when determining whether to refinance. Just because you can refinance now doesn't mean that you should. You may be economically better off just making your payments and riding things out in the short term, especially as property values are rising in many parts of the country.