What is an underwater mortgage?
“Being underwater or upside down on a home, car or other property means you’re in debt more than its current value,” says Greg McBride, Bankrate’s chief financial analyst. In other words, the assets are less than the amount you borrowed to buy it, or less than the amount of debt you still have to pay back.
If you buy a home when the price is high and the real estate market retreats, your home may depreciate or shrink. As a result, you can end up with a mortgage balance that exceeds its value. When that happens, you are considered underwater on your mortgage. It is also called having Negative Equity.
For example, suppose Jane bought her home for $300,000 and borrowed $270,000 with a down payment of $30,000. Two years later, the recession hit her city and Jane became unemployed, but in another state there are great job opportunities. She has to sell her home and move, but she learns that the value of her home in her area has declined and her home is currently marketable at $250,000, and she still owes $258,400 on her mortgage. She is currently underwater or upside down on a mortgage.
How do underwater mortgages happen?
Underwater mortgages can occur in one of the following circumstances:
- An era of recession: Underwater mortgages usually occur during economic downturns where homes are devalued. For example, during the 2007-8 subprime mortgage crisis, many borrowers ended up paying for far more than their homes are worth.
- Sell your house immediately after purchasing with a low down payment: If you buy a home with little or no money down, and try to sell immediately after purchase, the homeowner will turn upside down. “Even stagnant home prices can turn you upside down if you want to sell your home right away, as the transaction costs of the sale are more than offsetting the small shares you have,” says McBride.
- I’ll take it out Second mortgage: Retrieving a second mortgage that will drain most or all of your ownership can lead to an underwater mortgage.
The value of the home may also increase and decrease interest ratemany Foreclosure Or natural disasters.
Signs that your mortgage is underwater
Beware of these signs that may indicate that you are at risk for your mortgage or its:
- The value of the home is decreasing in your area. If the property values of a similar home nearby are decreasing, your home may be lower than what you owe.
- Your home will be rated lower. You can use the Home Value Estimator Tool to get ideas for the ballpark, but to identify it, you can get a home rating. Once you know the value, you can use your mortgage statement to determine if your loan is upside down.
- You’re having a hard time keeping up with your mortgage payments. Lagging behind your payments can be a sign of deeper financial difficulties, especially when your home is devalued and you cannot refinance.
Why can underwater mortgages be dangerous?
The idea of being in the water on a mortgage sounds scary, but if you’re planning on staying at home, you don’t have to affect your daily life. Most borrowers can continue to pay, and “over time you can get to the top right by paying back some of your major balances and seeing some thanks at home prices,” says McBride.
Still, you may need to worry about homeowners turning their mortgage upside down. The times for these risks are as follows:
- Refinance: Bruce McClary, a spokesman for the National Credit Counseling Foundation, a Washington, D.C.-based nonprofit, may feel that it’s nearly impossible for a recurrence unless you’re entitled to a government program or a certain type of mortgage.
- sale: Trying to sell your home underwater can put you at risk of having to pay the difference if you can’t earn enough sales to cover your mortgage balance. Alternatively, you will need to apply for a short sale with a lender. The bank agrees to accept that it is less than the total mortgage balance remaining from the revenues of sales.
- Losing a home: When your home is underwater, if the payments are too big for you, you are at a higher risk of foreclosure.
What if you are underwater on your mortgage
If you find yourself underwater on a mortgage, there are a few options to consider.
1. Stay at home and build fairness
In an upside down mortgage situation, you can choose to stay in your home and continue paying to reduce your loan principal balance.
“Essentially, you’re on the market until the value is in order and it’s high,” says Lott. “It’s beneficial to make this during this time Additional payments About the main balances of the loan while waiting for the home value to rise. ”
2. Exploring new fundraising
You’re less Refinance options Your loan may be underwater, but you may not be totally lucky. Talk to some mortgage refinancing lenders to see what you can do to refill your upside down mortgage. If your original loan is an FHA loan, you FHA streamlines refinance.
Unfortunately, the Housing Affordable Refinance Program (HARP) loans were at the sunset in 2018, and Fannie Mae’s High-Cost Loan (LTV) program was suspended.
3. Consider short selling
They could also take a short sale route to avoid foreclosure and move to a more affordable housing situation, McClary said.
With short sales, lenders must agree to accept that they are less than what is being paid on the mortgage, which is a loss for them, says Lott. Lenders will only consider short sales with the final option before short sales. However, please note that this type of transaction is harmful to your credit score.
4. I’m leaving my mortgage
Another option is simply to move away from your mortgage – a move called “strategic default,” but like short sales or foreclosures, doing so can damage your future homeownership prospects and credit scores. In short, this option also leads to a volatile financial situation. If you leave, your lender can even hold you responsible for paying off the debt.
Homeowners should get advice from a HUD approved non-profit housing counseling institution In these situations, it “helps identify solutions that are specific to your situation and your community,” says McClary. Other than leaving, there may be ways to resolve your situation. This is truly a last resort.
5. Let’s seize the lender
Finally, you can have your lender start the foreclosure process in your home. Once this process is complete, the lender will retrieve the home from the homeowner. The homeowner cleans up the debt but leaves the property with a damaged credit score. Many people in foreclosure file for bankruptcy to eliminate other debts.
These options have long-term consequences, Lott says. Bankruptcy and foreclosure can remain on your credit report for 10 years, and like any other option, you can The ability to buy another house Several years.
