Negative Am Mortgage Refinance

I have a negative amortization note on my current residence and need to sell my home. Should I try refinancing before listing my home?

2 Answers

As you probably already know, a negative amortized loan means that the total amount of interest accrued monthly is not required to be paid. The amount that is not paid monthly is added to the principle balance resulting in the loan balance increasing on a monthly basis.

With most neg ams, you have the option to make the neg am payment, an interest only payment, or the fully amortized principle and interest payment. Because of your current situation ( The need to sell ) I would recommend that you try to make the principle and interest payment if at all possible. If you manage to do this you will not lose any more equity in your home and therefore stand a better chance of selling your home. You will have the capability to accept a lower bid and therefore sell your home in a more timely fashion. (Of course I would need further details to give you the best possible advice)

I DO NOT recommend refinancing. If you refinance now you will incur expenses ( closing costs ). These expenses will further deplete your equity resulting in less proceeds from your sale. If you are in a situation with marketing times as long as one year, you may want to think about refinancing but if the property is likely to sell inside of 6 months, it is in your best interests to try and make your full am payment.

If you are already upside down in your house, in a negative equity situation, you should contact your lender right away and discuss the possibility of a short sale. You may also be able to negotiate a freeze on the adjustable portion of the note.... Which most Neg ams are. I hope this answers your question. If you need further clarification, please contact me.

This is an excellent question, and one that I have heard more than once, as people who have many different kinds of loans ask us if refinancing makes sense for them prior to listing their home for sale.

My standard answer to this query is that there is no one size fits all answer here. It depends solely upon the individual borrower and their unique set of circumstances.

Let me address the two most common scenarios for this type of borrower.

The first is for someone usually in some kind of adjustable rate loan, or one with unfavorable terms such as a neg-am loan. This borrower knows they have some kind of potential ticking time bomb of a loan and they want out! This is a normal feeling especially if a more "secure" type of loan such as a 30 year fixed would be available to the borrower. Usually, my answer to the borrower is it may NOT make sense to refinance if you think or know you will be selling the home quickly. If you are refinancing into a new loan that will add closing costs to the amount you already owe, only to turn around and payoff this loan in say, 6 months, you have not accomplished anything.

If, however, you may not sell, or are unsure, then perhaps it would make sense, but again this neds to be evaluated on a case by case basis. Some mortgage originators are able to propose a loan at a slightly higher interest rate and then use the "rebate" provided by the lender to offset or pay your closing costs. This may be the best way to proceed.

The second issue that comes up often is the dilemma of needing to access home equity, to be used to either payoff existing debt, or more often to "fix up" the current home on order to sell. Often, the need may be for down payment funds to be used for the purchase of the new home. again, there is no one-size -fits -all solution here, but this is a common request. Soemtimes the best product for this type of borrower would be a HELOC, or, Home Equity Line of Credit. These types of loans often allow a borrower to access 80-90% of the home's value, & carries an affordable interest only payment. There are usually little to no closing costs associated with this type of financing, and these loans can usually be obtained at your local bank at affordable rates. Be aware, there is usually some kind of penalty associated with early closure within a few years, but often this is better than paying closing costs, for a new 1st mortgage.

It is also important to note, it may make sense to refinance or borrow against your home BEFORE exposing it for sale, because many lenders will NOT lend to borrowers whose homes are currently listed for sale. Check with your lender to see what the rules currently are and how they may affect your plans.