In the beginning of the 21st century, loans for more than a home's value were relatively common. When a lender assumes that a home's price will skyrocket, today's risky loan becomes tomorrow's safe loan backed by ample equity. While intentionally upside-down loans are much rarer today, they are still around. You need to either be a very strong borrower or need to have a very specific reason to take the loan out.
125 LTV Equity Loans
Some home equity lenders will still lend you 125 percent of your home's value -- meaning that if your home's value is estimated at $150,000 by an appraiser, the lender will lend you $187,500, or 25 percent more than it is worth. These loans are known as 125 Loan-to-Value (LTV) Equity Loans. At this point, the lender's equity loan is essentially unsecured, since there's no equity to back it up. What the bank has going for it, though, is the threat of foreclosure. If you don't pay them back, they can foreclose on your house even if they don't get anything. This threat should provide motivation for you to pay them back. This is why, if you can find one, a 125 percent loan is frequently a better deal than a personal loan. It also may have tax-deductible interest.
FHA 203(k) Rehab Loans
If you're looking to buy a house and fix it up, the Federal Housing Administration has a special mortgage for you. The 203(k) rehab program can lend you up to 110 percent of the value of the property after it's been repaired. If you choose to take this loan, you'll need to outline the work that you want to have done to the property and provide estimates for what a licensed contractor will charge to do it. Also, the FHA won't let you use the loan for "luxury" renovations and may require you to do some energy efficiency upgrades.
Underwater Refinance Loans
When you have an underwater mortgage, which is a loan where you owe more than the property is worth, you may also be able to refinance it. While refinancing the loan won't make your high balance go away, it can entitle you to a lower payment if you're able to find a new loan at a lower interest rate. The Home Affordable Refinance Program lets you refinance loans that are owned by Fannie Mae or Freddie Mac that were made on or before May 31, 2009. In addition, streamline programs allow you to refinance United States Department of Agriculture, Federal Housing Administration and Veteran's Administration loans even if they're upside down.
When Your Equity Drops
Millions of Americans took out loans for less than the value of their house, but, when their home's value dropped, their loan ended up being for more than the house's new value. If you're in this group and you're happy with your loan, you don't have to do anything. As long as you keep paying your loan, your lender should keep collecting the payments and leave you alone. However, if you have a balloon, you may want to refinance with a loan that takes advantage of the U.S. government's special Home Affordable Refinance Program to a non-balloon loan if you're eligible before the balloon comes up, just in case. HARP loans generally let you refinance even if you owe more than your home is worth and are frequently easier to qualify for than regular refinance loans.
- Eminent Mortgage: Second Mortgage Loan Programs
- HUD.gov: Rehab a Home w/HUD's 203(k)
- The Mortgage Reports: HARP Refinance Program: The Complete HARP 2 Eligibility Requirements For U.S. Homeowners (Plus Mortgage Rates)
- PHH Mortgage. "Borrowing Basics: Home Equity Loans vs. Cash Out Refinancing." Accessed Dec. 17, 2019.
- Consumer Financial Protection Bureau. "What Is a Second Mortgage Loan or 'Junior-Lien'?" Accessed Dec. 17, 2019.
- Washington State Department of Financial Institutions. "Mortgage Refinancing Basics." Accessed Dec. 17, 2019.
- Discover. "Refinance 101." Accessed Dec. 17, 2019.
- FDIC. "State Housing Finance Agencies: First-Lien Mortgage Products." Accessed Dec. 2019.
- Citi. "The Refinance Application Process." Accessed Dec. 17, 2019.
- Discover. "Steps in the Home Equity Loan Application Process." Accessed Dec. 17, 2019.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.