Above-Water States: Refinancing Options for Homeowners

Before the housing market collapsed, most people had probably never heard of an under-water mortgage. Then many found themselves living with one, and some borrowers still owe more on their mortgages than their homes are worth. In eleven more fortunate states, though -- call these the "above-water" states -- home prices have fully recovered, giving homeowners in those states a wider range of refinancing and home equity borrowing options.

According to data from the New York Federal Reserve Bank, home prices nationally are still 17.6 percent below their April, 2006 peak, leaving many homeowners still under water on their mortgages. Those with such under-water loans are often limited in their refinance and home equity options. In contrast, the eleven above-water states have home prices that are between 0.6 percent and 35.6 percent above April of 2006 levels, giving most homeowners in those states positive equity in their homes.

The Lucky 11

Here are the eleven states where 2014 home prices are above the levels of April, 2006, when prices peaked nationally:

  1. North Dakota: up 35.6 percent.
  2. South Dakota: up 13.7 percent.
  3. Wyoming: up 13.0 percent.
  4. Texas: up 8.9 percent.
  5. Oklahoma: up 6.9 percent.
  6. Louisiana: up 5.9 percent.
  7. Colorado: up 4.7 percent.
  8. Alaska: up 4.3 percent.
  9. Nebraska: up 1.2 percent.
  10. (tie) Iowa and Vermont: up 0.6 percent.

At the other end of the scale, there are eleven states where home prices are 20 percent or more off of their April, 2006 levels. Worst off is Nevada, where home prices remain nearly 40 percent lower than they were eight years ago.

Refinancing and Other Options

Homeowners in the above-water states most likely have equity in their homes. What options does that open up for them? Here are some prominent examples:

  1. Rate-and-term refinance. Mortgage lenders are cautious these days, which means they prefer lower loan-to-value ratios when approving mortgages. Having more equity allows homeowners to refinance with lower LTV ratios. This makes mortgage lenders more confident, so it is easier for borrowers to get refinance approval, and they are often eligible to reduce their interest expense and/or lower their monthly payments.
  2. Cash-out refinance. Borrowers with a substantial equity position may choose to tap into some of that equity with a cash-out refinance loan. This is a low-cost way of borrowing money for home improvements or other projects.
  3. Home equity loan. Even if they already have a low mortgage rate, homeowners with equity in their homes can borrow against it, thereby obtaining credit at much lower rate than via personal loans or credit cards.
  4. Home equity line of credit (HELOC). This is another way of borrowing against equity, but it allows the homeowner to access credit only when necessary, so interest is only charged when the money is in use.

Above-water home prices are good news for borrowers lucky enough to live in those eleven states, but similar good news may be on the way for more people. The New York Federal Reserve Bank data shows that an additional seven states had peak-to-present home price declines of less than five percent. Since those figures are from earlier this year, in many cases those home prices may have already moved back into above-water territory.

Refinancing for Everyone Else

For those who have not amassed sufficient home equity to refinance in the traditional way, there may still be options for lowering interest rates and / or monthly payments. Those options include HARP, the Home Affordable Refinance program, which allows qualified borrowers with Fannie Mae or Freddie Mac mortgages to refinance regardless of their home value. In addition, borrowers with government-backed mortgages like FHA, VA or Rural Housing loans can often pull off a streamlined refinance, which does not generally require a home appraisal as long as the homeowner doesn't wrap the costs of refinancing into the new loan.

In short, refinancing opportunities are opening up across a growing portion of the country. If you have not done so lately, it might be worth checking whether your mortgage is back above water, and what refinancing opportunities you have as a result.

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