How to Get Out of an Upside Down Mortgage
An upside down mortgage is one where the balance remaining on the loan exceeds the value of a home. If you have an upside down mortgage, then you actually have negative equity in the property currently. First, it is important to understand the best way to handle this situation is usually to remain in the home for an extended period of time. As you make your mortgage payments, you will slowly gain positive equity in the house. If this is not possible, and you need to get out of the mortgage, then consider these strategies.
Sell the Home
The first option is to sell the home. In this case, you will lose money on the investment. Upside down occur when a buyer purchases the house at the top of a market, and then the home's value declines. If the borrower has not placed a large enough down payment or made large enough mortgage payments, the borrower has lost money on the investment at this point.
If you are in this situation and need to move or simply want to stop any further losses, try to sell the home for as much as you can. You will owe the lender the difference in the sale price and the remaining mortgage sum immediately. Some borrowers will not have the cash for this payment. In this case, you may take a new loan for the balance.
Refinance the Loan
If the market has changed drastically, you may be able to walk out your door and find a better mortgage on the remaining sum you owe than the mortgage you currently have. In this case, you can try to refinance directly with the lender. Lenders are typically more reluctant to offer this option because they stand to lose money.
When you refinance, your best option will usually be a separate lender or the federal government. The government offers refinance options through the FHA, but these options are only extended to victims of predatory lending. If you received a subprime loan, made payments before the rate adjusted and can no longer make payments, you may be eligible. Otherwise, shop your mortgage around to other traditional lenders.
Settle the Debt
If you fear you will face foreclosure, the lender may be willing to work with you in order to mitigate the potential losses they will experience if a foreclosure occurs. Lenders rarely recover fully if a home is seized and liquidated, especially in a bad market, so you may find this process easier than you think.
Ask for a quote to settle the remainder of your mortgage. Then, shop for a new loan that would totally pay off that quote. The lender may adjust the remainder of your mortgage to a level more in line with the value of the home, mitigating your losses and getting you out of the upside down situation.