My husband and I had been sitting on a 6.75% mortgage when we decided that refinancing down to a 5% rate would make financial sense. Not only would we be paying less to interest, but the additional savings would help span the gap between our paychecks and rapidly escalating expenses. The problem as millions of other Americans across the country have also discovered is that many of us are upside down financially in our homes. Being “upside down” in a mortgage is recession-speak for owing more on a house than it’s worth.
The current value of your house is worse than you think
When my primary property and a newly built rental were appraised last week, I darn near died of a heart attack. Both structures came in at 50% below their 2008 values which pretty much blew any chance of refinancing, or so we thought.
Across the country, a 20 to 30% drop in housing values seems to be the norm. In regions that were swept up in the frenzy of skyrocketing property values, houses have plummeted to 50-60% of their pre-crash value. Since banks will now only loan against 80% of the appraised value, these low values mean that refinancing is out of the question unless you or your banker can pull off a miracle.
Creative financing redefined
As near as hubby and I have been able to determine, that are three ways that a refinance can be pulled off when homeowners are upside down in a mortgage.
1. Transfer part of the debt to another property. If you own a vacation home, office building, or a rental property, your banker may suggest borrowing against these properties to lower the debt on your primary residence. For this refinancing plan to work, the secondary property must be free & clear or at least have enough equity for the deal to work. In a simultaneous closing, the bank pays off your original mortgage and then redistributes the new debt between the two properties.
2. Borrow from your parents. This second plan assumes that your parents or some rich relative have money sitting around somewhere. In this scenario, the relative pays down the “upside down” portion of the existing mortgage so you can refinance. After the deal is closed, the relative can be repaid the loan in monthly installments at the going interest rate.
3. Have a massive yard sale. Off course, I’m joking a little here but the truth is that lots of us have stuff that we really don’t need and could be sold off to raise some money. Antiques, art work, classic cars, or expensive jewelry can also be sold off to bring down your mortgage into the black again so that it can be refinanced. Once the home has been refinanced and your financial situation improves you can go back to collecting stuff again.