Having an ‘underwater mortgage’ means that your house is now worth less than the mortgage you have to pay. Say you purchased a home valued at $300K, which could now sell for $200K. In this case you have an underwater mortgage or are upside-down on it.
Millions of people from all over the world are facing this problem and in some cases this negative equity has proven to be a disaster. Some had to sell and lost a lot of money, while others still struggle with payments, desperate to make it through the entire debt payment.
How bad is an underwater mortgage?
.. well, it depends on where you ‘sit’. If you can still afford the payments and don’t need to move from your current location, you’ll just have to wait for your home value to slowly rise again. If you need to move then you’ll face more serious problems and will have to take a huge loss or seek refinancing alternatives.
Just wait it out
Prices in homes will rise in the next year, as the economy will slowly recover. This is why the huge difference between what you owe and own at the moment will slowly ‘dissolve’. If you can afford your payments and don’t have to move from where you currently reside, just hang in there. Lots of people from all kinds of countries are diligently paying off their loans, while also enjoying their home.
Let’s not forget you bought a home for you and your family, even if its value is less than what you initially bargained for, it’s still YOUR HOME!
Move and still pay the mortgage
You might get a great job offer in another city and still be ‘tied’ to your underwater mortgage. Sure, you can still make the payments, so you’re in no rush to get a refinance or any other solution, but still you have to move and have an empty home.
In this case it would make sense to find tenants for your home and then rent a space in the city you have (temporarily) moved. If you get a good deal (and the rent is cheaper where you move), you might even get some money left each month.
Refinance your underwater mortgage
The good thing with the loans market today is there are options, so ideally you’re not stuck in an impossible situation for long, especially if you have a good credit score and made all your monthly payments in time.
If option no.1 “wait it out” doesn’t apply to you, there is still a chance to get on better terms with your debt: refinancing. Sure your mortgage company might not like the idea of doing this, if they see you owe more than your home’s worth, but there are government programs that might work, if you qualify.
You won’t be able to erase what you owe, but you can get a better interest rate for your underwater mortgage and this will allow you to manage the monthly payments easier. Getting a loan with fixed APR will prevent the interest rate from rising, thus making your monthly payments big again.
There are unfortunate situations when you have to sell, because you’re moving or because you cannot afford the payments anymore, even if you’d get a refinance. In this case you’ll have to work with your bank to accept less money than the loan is worth so that the home can be sold. Many banks will agree to this, if you had problems with your underwater mortgage payments or are already facing foreclosure.
You need to be prepared to ‘cover’ the difference, since only in some cases the bank would agree to forgive you for the difference between the selling price and what you owe.
This is probably the worst option of them all, you just walk away from the home and the bank will take over. You can get into automatic foreclosure if you have missed payments. Again, you need to be prepared to be asked to pay for the difference (what they sold the home for and what you owed on the mortgage) and your credit record will suffer from it. Many consider this to be the last resort, when there’s absolutely no way to work around your underwater mortgage.
I personally know families who are in different situations:
- one is having 3 mortgages and, even if the home value dropped, they’re making the payments since the houses are great equity and will increase in value in the future (not to mention, by renting 2 of them, most of the loan is paid by the tenants anyway)
- some have underwater mortgages, but they don’t plan on moving out and they purchased the homes anyway for the family – they stick to the payments and hope to be debt free soon.
- one was forced to accept a foreclosure and lost around 70K on the home. He had a divorce and he’s also moving to another state for his job.
Have you faced the problem of having an underwater mortgage? Do you know anyone close? What solution worked best?