Negative Equity - Is Refinancing an Option?

By: J Suffie

Sometimes life can just deal you a bad hand. If you're in a situation where your house is worth less than what you owe on it, you have what is called negative equity. There are a lot of ways that you can end up in negative equity. For the most part, however, it comes from buying close to the top of a housing boom.

When a housing boom happens, house prices go up and up, giving you more and more equity. During these times, it's not uncommon for people who bought early on to end up with so much equity that it's more than double the amount they purchased their home for just a few years earlier. This can leave you with a feeling that maybe you should purchase a bigger house or move to a nicer area. After all, the money is just sitting there in equity. Why not use it? You may have already taken a little bit of your equity out to pay off you credit cards and your cars. You may have even gone on a nice vacation. You've decided that buying a better house is a great idea.

So you sell your house and use most of your equity to buy a newer house in a nicer neighborhood. It's a gorgeous house. You have a big yard and a nice pool. The kids can walk to school. The shopping centers are new and clean. You can even drive to work in less than 10 minutes. It's perfect. Everybody is happy. You don't have all of that equity anymore, but you have some. It's the best move you have ever made.

Then it happens. Summer of 2007. August. House prices dropped so fast that you swear you heard a whooshing sound. That little bit of equity you had disappeared overnight and a couple of months later you had to face that fact that you were going to be in negative equity for a very long time.

If you've found yourself in this situation, you're not alone. Having negative equity is very common right now.

The good news is that your home will begin to increase in value again. When that will happen is uncertain, but it will happen. Your house will also never be worth nothing. It's just worth less today than it was one or two years ago, but in ten years, it will most likely be worth more than you owe on it. This will partly be due to you paying your mortgage, and partly due to the value of your home increasing. In an average market, home values increase around 10% per year. So, unless you absolutely have to sell, the best thing to do is to stay in your home, and just ride it out.

With interest rates getting lower, you may be wondering if refinancing is an option. Refinancing with negative equity is more difficult, and is only possible in some cases. There are a few programs out there that you may qualify for. Speak to a mortgage professional about your options in this area. Converting to a fixed rate mortgage or a lower interest rate may be worth it if it improves your financial standing in the long run. Carefully consider all of the pros and cons, as well as the fees involved, before refinancing.

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