What Is An Underwater Mortgage Loan?

What is an underwater mortgage? This kind of mortgage is when a homeowner takes out a loan and, at the same time, a lender extends credit to the homeowner at a higher interest rate than is usual for an individual. Usually, the interest rate on this type of mortgage is considerably higher than what one would pay if applying for a standard mortgage. In this case, the lender is taking on more risk by extending the credit.

In most cases, borrowers are not aware that they are dealing with an underwater mortgage situation. Since lenders usually have to write such loans based on their understanding of the borrowers' financial crisis, most do not realise something wrong. However, if you discover that your home equity is insufficient to make your monthly payments, you can opt to take out a mortgage refinancing to get additional cash. There are two main types of underwater mortgage refinance loans: mortgage refinancing secured by a property and unsecured mortgage refinancing that is unsecured.

Under the former type of loan, the homeowner has to put his home up as collateral to secure the loan amount. The lender will require the borrower to sign a form indicating that he understands the risks involved. Borrowers can avoid legal issues and expensive fees by ensuring that they read and understand all the terms and conditions in the contract before signing.

If the borrower fails to meet the deadline for applying, the lender can foreclose on the house. This is why it is essential to understand the fine print and avoid signing any document which is not clear and without understanding. For unsecured loans, borrowers need to make different arrangements to secure loan interest rates. There may be extra fees like balloon payment and conversion charges, making these loans costlier than regular mortgages.

It is essential to investigate adequately the options available to settle the loans. There are options to sell the home, settle by instalment or use the proceeds to pay off the principal loan. To know about these options, you can contact real estate agents who can give you a good idea about the plans. You should get in touch with your state attorneys general and find out if there are any outstanding lawsuits regarding underwater mortgage loans.

It is essential to consider the present value of your home. If you have a home loan which is more than ten years old, you may have to sacrifice a percentage of your home. Usually, the lenders have to foreclose on the property on which the loan is based upon the house’s present value. This will make the loan interest rates go higher. It can also be beneficial for you to sell the home.

However, if you don't own the home anymore, and still owe on loan, the lender must take legal action against you. In that case, the entire amount you owed will be discharged. It is also not good for your credit rating. So it is advised not to use these types of loans if you do not own the home anymore.

Despite these drawbacks, many consumers use mortgages for securing a better rate. They may have a bad credit score, but they can still qualify for a competitive rate through an underwater mortgage refinance. They can use the money to pay off the existing mortgage, which will reduce the monthly payments. This is also the best way to repair bad credit history. It is advisable to contact a mortgage broker for more details.