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How to Sell or Refinance With Low Equity

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Feel like you’re underwater? Consider these options for low-equity homeowners.

Even though the economy is on the upswing, it’s impossible to forget how many people were hit hard by the housing crisis. You may even be one of them, especially if you’re still dealing with a home that’s underwater.

You’re not alone. If you owe more than your home is worth, it can be tempting to run. But remember, when you sell your home, you can expect to pay anywhere from 6% to 10% in fees and commissions. Depending on how much you owe, you may have to bring money to closing — even though you’re selling — if you don’t have enough home equity.

Short sales without recourse are an option, but your lender has to agree to them. And although a short sale can get you out from under your mortgage, there are serious consequences to pursuing this option — it’ll damage your credit and make it difficult to get another mortgage anytime soon.

Another, potentially smarter, option? If you can swing it, delay your home sale and work to refinance your home. You may actually create a profit in the long run.

By working more than one strategy, you’ll likely reduce your loan-to-value ratio (or LTV, how much you owe versus the value of your home) to below 80% before you know it. Here are a few places to start.

Contact your lender

The bank that holds your mortgage may have programs in place to help you refinance and make your payments more affordable.

One thing the bank will consider is your LTV ratio. If it’s above 80%, you’ll have to pay for the added expense of mortgage insurance.

You can always ask whether you’d qualify to refinance your loan into two loans: a first mortgage and a line of credit. This option may be smart if the total monthly mortgage payment of the two loans is lower than what you’re already paying.

Readjust your budget

There are two sides to every budget: your income and your expenses. One option would be to earn more money that can be used to pay down your mortgage. Easier said than done, right?

Another option is to tighten up your budget and reduce all but essential expenses so you can allocate more money to your mortgage payments. By paying more each month than what’s due, you may be able to lower your LTV enough so that you don’t owe any money at closing.

Wait it out

As the economy continues to improve, so do home prices. Depending on where you live, delaying a sale may buy you extra time to allow your home to appreciate — assuming you can remain patient.

Become a landlord

If you have to move but don’t have any equity in your home, selling won’t provide you with money for a down payment on a new home.

It’s worth trying to rent your home so that you at least break even. If you don’t plan on moving right away, consider renting a room in your house to supplement your income in the meantime.

Look to the government for assistance

Depending on your loan balance, the U.S. government has different assistance programs that can help. Keep in mind, they have strict qualification criteria, and some have specified end dates — if you are eligible to take advantage, don’t procrastinate.

The federal Making Home Affordable (MHA) Principal Reduction Alternative works with lenders to lower the amount that’s owed, provided borrowers meet certain eligibility criteria.

This program is for mortgages originated on or before January 1, 2009, on your primary residence. The loan balance can’t exceed $729,750, and the monthly mortgage payment has to be more than 31% of your monthly income. There are other requirements, such as you need to have a financial hardship and your mortgage can’t be owned or guaranteed by Fannie Mae or Freddie Mac.

If your loan was sold to Fannie Mae or Freddie Mac, you may be eligible for MHA’s Home Affordable Refinance Program.

To refinance your home under this program, your mortgage must have originated on or before January 1, 2009, and your LTV must be above 80%. You must also have a good payment history for the past 12 months and be current on your loan. But be quick: This program ends December 31, 2015.

The government may have other programs you qualify for — finding a reputable mortgage professional will help you figure out what other options are on the table.