Underwater Mortgage and Factors to Consider Before Refinancing

If you’re a homeowner with an underwater mortgage, you may be wondering if it’s possible to refinance your loan. An underwater mortgage occurs when the value of your home drops below the amount you owe on your mortgage.

Can I Refinance My Underwater Mortgage? What You Need to Know
Can I Refinance My Underwater Mortgage? What You Need to Know

This can make it difficult to refinance and take advantage of lower interest rates. In this article, we’ll explore the factors that determine whether you can refinance an underwater mortgage, the different refinancing options available, and what alternatives you have if refinancing isn’t possible.

What is an Underwater Mortgage?

An underwater mortgage is when a homeowner owes more on their mortgage than the current value of their home. This can happen when home values decline or when the homeowner takes out a mortgage that is too large for their financial situation. Being underwater on a mortgage can make it challenging to refinance, sell the home, or build equity.

To determine whether you have an underwater mortgage, you’ll need to know the current value of your home and the outstanding mortgage balance. If the outstanding mortgage balance is higher than the current value of the home, then the mortgage is underwater.

Can You Refinance an Underwater Mortgage?

Refinancing an underwater mortgage can be difficult, but it’s possible. Lenders typically look at the loan-to-value ratio, credit score, income, and type of loan to determine whether to refinance. If you meet the requirements, you may be able to take advantage of lower interest rates and monthly payments. If not, you may need to consider other options for managing your mortgage.

Why Refinance an Underwater Mortgage?

If you have an underwater mortgage, you may wonder why you should bother trying to refinance it. Here are some reasons why refinancing might be a good option:

  • Lower interest rates: Refinancing to a lower interest rate can save you money on interest payments over the life of the loan.
  • Lower monthly payments: Refinancing can also lower your monthly mortgage payment, which can make it easier to manage your finances.
  • Fixed-rate mortgage: If you currently have an adjustable-rate mortgage (ARM), refinancing to a fixed-rate mortgage can provide more stability and predictability in your monthly payments.
  • Build equity: Refinancing can also help you build equity in your home over time. With a lower interest rate and monthly payment, more of your payment goes toward the principal balance of the loan, which can help you build equity faster.

While there are benefits to refinancing an underwater mortgage, it’s important to carefully consider your financial situation and the costs associated with refinancing. Refinancing may not be the best option for everyone, so be sure to weigh the pros and cons before making a decision.

Factors to Consider Before Refinancing

Before refinancing your underwater mortgage, consider the following factors:

Closing costs

Refinancing can come with closing costs, including appraisal fees, title fees, and origination fees. Ensure you understand the costs involved and factor them into your decision.

Time in the Home

If you plan to move soon, refinancing may not be worth the cost. Consider how long you intend to remain in the home before refinancing.


Having little to no equity in your home may make refinancing more difficult and expensive. Lenders typically want to see at least 20% equity before considering refinancing.

Credit Score

Your credit score affects your ability to refinance and the interest rate you may qualify for. Ensure your credit score is in good shape before applying for refinancing.

Monthly Payment

Refinancing can lower your monthly payment, but it can also extend the term of your loan. Consider whether you’re comfortable with a longer loan term before refinancing.

Keeping these factors in mind, you can make an informed decision about whether refinancing your underwater mortgage is the right choice for you. It’s also a good idea to compare lenders to find the best interest rates and terms for your situation.

Steps to Refinancing an Underwater Mortgage

To refinance an underwater mortgage, follow these steps:

  1. Check your credit score and gather necessary documentation.
  2. Shop around for lenders to find the best interest rates and terms.
  3. Apply for refinancing and answer questions about your income, credit score, and home value.
  4. Wait for the appraisal, which will help determine the terms and interest rate for your new loan.
  5. If approved and the appraisal comes back with an acceptable value, close the loan by signing paperwork and paying closing costs.

By following these steps, you can potentially save money on interest and monthly mortgage payments. Just be sure to carefully consider the costs and weigh the pros and cons before making a decision.

Alternatives to Refinancing

If you can’t refinance your underwater mortgage, consider these alternatives:

  1. Loan modification: Negotiate with your lender to lower your interest rate or extend your loan term.
  2. Home Affordable Refinance Program (HARP): Refinance your mortgage even if you owe more than your home is worth (if your mortgage is backed by Fannie Mae or Freddie Mac).
  3. Sell your home: Use the proceeds to pay off your mortgage.
  4. Rent out your home: Cover your mortgage payments by renting out your home.
  5. Short sale: Sell your home for less than you owe on the mortgage, with your lender forgiving the remaining debt.

By exploring these options, you can find a solution that fits your needs and avoids the consequences of defaulting on your mortgage. However, be sure to weigh the pros and cons before making a decision

Frequently Asked Questions

Can I Refinance an Underwater Mortgage with Bad Credit?

It can be difficult to refinance an underwater mortgage with bad credit, as lenders typically look for a credit score of at least 620. However, it’s not impossible. You may need to shop around to find a lender willing to work with you, and you may end up with a higher interest rate or less favorable terms.

Is it worth Refinancing an Underwater Mortgage?

It depends on your specific situation. Refinancing can help you save money on interest and monthly payments, but it also comes with closing costs and other fees. Consider the costs and benefits, and weigh them against your financial goals and circumstances. If you’re unsure, consult with a financial advisor or mortgage professional for guidance.

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