Refinancing with zero equity

Will I still be able to refinance even if I now have zero equity?

There was a time when equity seemed to spring up in homes overnight. During the boom years when property values were enjoying an exponential increase for no tangible reason, homeowners would find that they had tens of thousands of dollars in equity, even though they had not made enough mortgage payments to significantly reduce their principal.

This access to equity allowed many refinancing deals to be done. And even if you had no equity, banks often speculated that the value of your home would rise and didn’t mind investing in a “sure bet.”

Now, refinancing has become quite a bit more difficult, because instead of increasing in value, homes are decreasing in value. This means that many homeowners are upside down in their loans and owe much more than the homes are worth.

When you have a financial interest in your home through equity, it’s much easier to get a bank to loan you money and refinance your existing mortgage. But when your financial situation is dire and you owe more on your home than it’s worth, or if you have no equity at all (even if you aren’t upside down), banks have little interest in accepting the risk that you present and are much less likely to invest in you.

It will also be difficult to get a loan if the bank isn’t sure whether or not the value of your property will drop even further after the loan is issued.

If you’ve got equity and good credit, you can compare refinance rates with the hopes of getting a good deal. If not, you may be out of luck for the time being.

Home Loans tips: This tip was originally posted on 6-2-2010 at 8:35 am.

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