Refinance Negative Equity Mortgage?

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Here’s my situation. I purchased this house for $ 450k back in 2005 and did about $ 200k worth of remodeling to it, however, I have not added any new square footage. It’s all been in stuff like dual-paning the windows, upgrading electrical, paint, hardwood floors, bathrooms, kitchen, etc.

So, let’s say a $ 650k total investment. The neighborhood I live in is quite old and has not had many sales in recent years.. everybody living here has been living here for like 20+ years. The last sale occurred when an old guy died a year ago. There just aren’t any real comps to go off of. Also, with the exception of 1 or 2 houses in the area, they’re all built in the 50s and have seen nowhere near the level of remodeling that I’ve done to my house.

I’ve had two appraisals done and they’ve both come back at around $ 310-$ 320k. I currently owe about $ 340k. Ok, fine.. so my house has lost 30% from what I purchased it for but let’s say I get even 50% out of the improvements I’ve made, doesn’t that bring the value up to $ 400k+? It seems like the appraisers aren’t valuing the improvements I’ve made at all, and I have even given them a sheet with a breakdown of how all the money was spent and what was improved. I have no doubt that if I had to sell this house, I could get $ 400k in a heartbeat. It’d be a steal at $ 400k but then I can’t prove that without actually selling it, which I don’t want to do. I much prefer to hang on to it for a while until the value catches back up a little.

Unfortunately, my neighborhood is within a half mile of a pretty poor neighborhood where houses have been getting foreclosed on all over the place and selling for as low as $ 50k. There are some other decent neighborhoods within 1 mile where similar houses (in terms of bed/bath sqft) have sold for $ 250-$ 300k but those are very few, and I’m sure again that they haven’t been remodeled as extensively as mine.

Now, I understand that I’ve probably “overimproved” my house beyond what it could ever fetch in this neighborhood but for chrissakes, it’s definitely worth more than $ 320k.

The problem I have is that my ARM has just gone adjustable to nearly 9%, and according to the appraisers, I owe more than the house is worth. I don’t have the $ 20k+ cash to make up the difference for a refinance. I’ve spoken to a few banks and they all say that they’ve gotta go with what the appraisers tell them and they can’t give a loan for an amount more than the house is worth (according to their appraiser). My FICO is around 660 and I’m sure I could get a much better rate on a refinance if I could only find a way to have the appraisers up the value a little.

So, I guess the question is kind of 2 parts..

1. Is there any way to refinance when you’ve got negative equity? If yes, how do I go about doing that?

2. Do you have any recommendations for getting the appraisal up another $ 20k so I can do a regular refinance?


  1. Reply
    May 3, 2011 at 5:51 am

    #1 The only chance you have of refinancing with a negative equity is thru your current investor/lender. They are already on the hook for the property and may have the only reason for helping you out.

    #2 The list you gave to the appraiser was a good idea but listing the money you spent was a waste of space. They will only care about the value added- not the money spent. So the list should only talk about the quality of the products and workmanship- and maybe how it would benefit any future owner (energy savings or comfort or such).
    It sounds like you spent money on stuff that did not raise the value much. New windows usually don’t raise the value much if any and neither does electrical. People also don’t usually want to pay a lot more for a house than it appears the neighbors houses are worth.

    But rewording that list to aim more at what benefits you have added rather than how much you spent might help.

    Also have someone help you look over the comparables used and see if any mistakes were made (On mine they said one house was on the lake when it was not) or if you can have a real estate friend help you look for better compareables.

    Good luck.

  2. Reply
    May 3, 2011 at 6:08 am

    Some improvements add value to the home and some don’t. If you updated the bathrooms and kitchens, new cabinets and fixtures for instance, that would add value to the property. Windows, paint, flooring, updating systems like the electric are more maintainance items and don’t really add much value. They’re for your benefit and will make it easier to sell the house, but you’re not selling so all you can really do is enjoy the benefits of the nice new stuff.

    What you can do is pay the difference. So the value is $ 320 and you owe $ 340. The lender will probably lend you 80% to 90% of the value, so say $ 288,000 (at 90%), and you would pay the difference between that and the payoff of your mortgage, about $ 52k plus whatever the closing costs are. Of course it would be more if the LTV is only 80%.

    Take a look at the calculator to see what the new payments would be. Don’t forget to add taxes and insurance if you get a 90% LTV.

    Do you know what your new rate will be yet?

    As for the appraisal, the lender will not use an appraisal you ordered. They’ll want their own anyway, so don’t spend anymore money on that. When you estimate the value for the lender, tell them more than those appraisals said, enough to get what you want. It may not work as well anymore, but what I noticed is that if you say the value is $ 300k, the appraisal will not be more than that. So tell them it’s $ 425k, and maybe you’ll get somewhere in between. Or not. Like I said, that used to work but things are funky these days.

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