What Happens if the Mortgage Is More Than the Appraised Value of the Home?

Being underwater on your mortgage can cost you a significant amount of money.

Being underwater on your mortgage can cost you a significant amount of money.

You owe more on your mortgage loan what your home is currently worth, at least according to your property's latest appraisal. Usually, this has little impact. But if you're trying to refinance your mortgage loan or sell your home, being underwater -- as it's called -- can cost you money.

The Appraisal

A real estate appraiser looks at several factors -- the results of similar home sales in your neighborhood, the square footage of your home, your property's age and any improvements you've made -- when determining the current market value of your home. The challenge comes when an appraiser determines that your home is worth less than what you owe on your mortgage loan. Being underwater in this way can scuttle an attempt to refinance or sell a home.

Refinancing Problems

Most mortgage lenders approve refinances only for homeowners who have at least 20 percent equity in their properties. Homeowners who owe more on their mortgages than their home's current market value don't meet this threshold. In fact, they have negative equity. Because most lenders won't refinance their loans, these homeowners are often stuck with higher interest rates. And this can make a big difference in the amount of money they pay each month. A homeowner with a 30-year fixed-rate mortgage loan of $220,000 with an interest rate of 6 percent would pay about $1,319 a month. If that same homeowner had an interest rate of 3.5 percent, the homeowner would pay just about $987 a month. That's a monthly savings of more than $330 lost because of negative equity.


Negative equity also causes problems when homeowners are trying to sell. Possible buyers will hire appraisers to determine the value of any home they are interested in purchasing. If that appraised value comes in lower than the asking price, the lenders working with these buyers often refuse to provide them a mortgage loan for the property. This can prevent buyers who want to purchase a home despite the difference in the appraised value and the asking price from completing their buy. And it can make it difficult for sellers to unload their homes.

Solutions for sellers

There are solutions for homeowners struggling with negative equity. Owners who want to sell can either lower their asking price so that it equals their home's appraised value or they can negotiate a short sale with their lender. In a short sale, lenders let homeowners sell their homes for less than what they owe on their mortgage loan. Short sales can be tricky, though. Lenders must approve all short-sale offers. If they don't approve an offer, buyers will either have to make a new offer or walk away from the home.

Refinancing Solution

Homeowners who want to refinance their mortgage loan even with negative equity can work through the federal government's Home Affordable Refinance Program. This program provides financial incentives to lenders who agree to refinance the home loans of owners who have little, no or negative equity. To start a refinance through HARP, you can call any mortgage lender licensed to do business in your state. To participate in HARP, though, you will need to be current in your mortgage payments and be paying off a loan owned or guaranteed by Freddie Mac or Fannie Mae. You must also not have missed a mortgage payment in the last 12 months.


About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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