How To Refinance A Mortgage With Negative Equity

Learning how to refinance a mortgage with negative equity is part of basic finance rules 101. Refinancing is a very hot topic today and everyone is looking to save their homes and get a lower interest rate, but how do you do this if your home has negative equity? Negative equity is when the value of the home is lower than the balance of the mortgage. An example of that would be a home with a $100,000 mortgage that is now worth only $90,000.

How to Do a Rent-Back When You Refinance a Mortgage with Negative Equity

The owner of the property has a few choices in refinancing a home with negative equity. He can do a short sale and do a rent-back, which is to sell the home to a friend with short sale approval from the bank for a lesser amount. The friend then rents the home back to the seller of the property until the seller of the property can afford to refinance the property into their own name. There are some pros and cons for this type of financing due to the fact that friends sometimes will become enemies. 

In normal rent-back situations, the seller of the property has used his own cash and the purchaser of the property has not used any funds at all. What the purchaser of the property has donated is their very good credit and income. Years ago the properties were being quit-claimed to the seller to secure his part in the deal, but banks were becoming wise to this "scheme" and calling loans due. Today there may be a paper in escrow signed or merely a shaking of hands.

Co-signer Helps to Refinance a Mortgage with Negative Equity

Banks will look at strong borrowers when there is negative equity involved on the loan. Firstly, the bank does not want to have the home in foreclosure and lose more money. When modifying a loan, the bank will not lower the loan amount. The bank prefers to adapt the terms. So basically refinancing a home with negative equity is a modification loan. With an additional strong co-borrower, the bank may refinance the loan or the bank may simply refinance the mortgage based on the seller's very strong credit alone.

A  Down Payment Needed to Refinance a Mortgage with Negative Equity

If the seller's main interest in refinance is to lower the terms or the interest rate, the bank may consider money being applied to the loan to help in negotiating the new terms. In other words, if the loan has a negative value of $10,000 and the seller agrees to deposit between $5,000 and up, the bank may renegotiate the loan's interest rate. Keep in mind that a new refinance will bring in new closing cost and points. Many times a bank will add the closing cost to the mortgage itself, but with negative equity this is slim.

When considering any refinance, take into account the total amount of money necessary to refinance the mortgage. This would include: down payment, closing costs, points and escrow fees.  Amortize this amount over the length of the loan to see how much money is saved each month.

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