Fewer homeowners underwater

One of the biggest obstacles to refinancing for many homeowners is a lack of equity. Declining home values across the country have left many families owing more on their mortgage loans than their home is worth.

In a small piece of good news, CoreLogic, a provider of information and analytics, released data from the end of the first quarter of 2011 that shows a drop in the number of underwater homeowners. About 22.7 percent of all residential properties with a mortgage are now in negative equity, or about 10.9 million homes. Negative equity means the size of the home loan is more than the current market value of the home. At the end of the fourth quarter of 2010, 23.1 percent of all homeowners were underwater, or about 11.1 million homes.

By itself, being underwater doesn’t matter as long as the homeowners can make their monthly payments. By paying down the principal balance on the home loan, the homeowners will eventually rebuild the equity they have lost due to reduced home prices. As the real estate market improves and home values rise, their equity will build faster. The danger of negative equity kicks in when the homeowners must sell their home because they have experienced a loss of income or need to relocate, because those homeowners may be unable to sell or must negotiate a short sale with their lender.

Refinancing and negative equity

If you want to take advantage of low rates and apply for a home refinance, you may find it more difficult if you owe more on your current loan than your home is worth. A lender can give you a definitive answer based on an appraisal about your ability to refinance. Some homeowners opt to refinance into today’s lower mortgage rates by paying down their loan balance with cash at the settlement table to offset a low or zero equity situation. Consult with a lender to review your options.