How to Deal with an Upside Down or Underwater Mortgage
The terms Upside Down or Underwater Mortgage may bring to mind a terrible situation for your home, or you may even associate it with losing your house. While an Upside Down Mortgage is not the best position financially, it is not the end of the world. Read on to learn everything you need to know about Upside Down and Underwater Mortgages.
What is an Upside Down or Underwater Mortgage
Upside Down and Underwater refers to a mortgage where the home is valued less than the loan’s balance, meaning you have no equity in the house. Essentially, you owe more on your house than it is worth, so selling the home would lose money. You will also be unable to refinance as most lenders require at least 20% equity to refinance. It may seem like a dire situation, and if you can no longer afford your current payments or are hoping to sell, it could be, but being upside down is not long term. First, we can discuss some of the common causes of Upside Down mortgages.
What are Some of the Causes of Upside Down Mortgages
Being underwater on your mortgage can be caused by a variety of factors. These are a few common ways in which your home value could drop below your loan balance.
The housing market is continually shifting. Home prices rise and fall with demand and other external factors such as increasing property taxes or rent prices. These fluctuations can impact your home’s value, leading to a decrease in your equity. However, these fluctuations correct themselves over time and are usually not drastic enough to affect your equity if you have built it over several years.
If there are other homes in your neighborhood that have been foreclosed or sold in a short sale, it could affect the value of your home. This is because your home value is partially tied to the sale of homes around you. Another house selling for well below the price it would typically be worth could affect the square footage price of a home in that neighborhood and, in turn, drop your home’s value. It can be a warning sign if you see several homes in your area suddenly selling at a lower price.
High Mortgage Rates
While higher mortgage rates do not directly affect your home’s value, they do affect your equity. Even if you have made payments regularly for a few years, a high mortgage rate could mean that most of your payments have gone towards interest and not the principal. Find out how much of your payment goes towards your principal with our mortgage calculator.
Without paying down your principal and building equity, you are more susceptible to Upside Down Mortgages since a slight drop in home value could be enough to wipe out the small amount of equity you have.
What Can I Do About My Upside Down Mortgage
We mentioned that an underwater mortgage was not the end of the world. The truth is that it is not. You have a few options if you find yourself in this situation.
Perhaps the most prudent option is to stay in your home longer and continue making payments to build equity. Because you are Upside Down, it could take a considerable amount of time. However, if you are close to the end of your loan term or have just started making payments, staying in the home may be your best option. If you decide that you are unwilling or unable to continue making your regular payments, you do not have to lose your house to foreclosure. Aside from forbearance, some lenders will allow a short sale.
Short sales, like foreclosures, should be considered a last resort. We recommend you speak with your lender before making a decision. In a short sale, your home is sold for its current value or sometimes less. Your proceeds are used to pay your loan balance, and, in exchange, the remainder of the balance is usually forgiven. However, not all lenders will provide this option, and keep in mind that a short sale will significantly affect your credit history.
Should I Be Worried About My Home
As mentioned above, an Upside Down Mortgage does not need to end in foreclosure. If you can afford to keep making your regular payment, you should do so and wait until your home value goes back up, or you have built enough equity to refinance. In the case where you can no longer afford your payments, you can speak with your lender about forbearance before having to sell or lose your home. It is not an option for everyone, but your lender can help you decide which options you have.
How to Prevent an Underwater Situation
Like any issue, it makes sense to prevent it before it occurs. If being underwater on a mortgage is something that concerns you, you need to stay vigilant and on top of payments.
Make Regular Payments
Provided you do not have an exorbitantly high mortgage rate, making your regular monthly payments should keep you in a good position with building equity. This does not happen overnight, though, so make sure you use tools like Zillow or Realtor.com to track your home value. You can also use our Amortization Calculator to tell you exactly where you will be on your loan in a few years.
Evaluate the Market Before You Buy
When you shop for your home, be aware of the market for your neighborhood. Is it at an all-time high and likely to drop after you buy? Buying when the home’s value could lead to an Upside Down Mortgage, but prices are known to rise for years at a time. If you plan on staying in your home long-term, this may not be an issue for you. Ask your realtor for advice on market conditions if you are unsure.
Refinance When Needed
If you know you will be unable to continue making payments but still have some equity, you should look into refinancing. A refinance could be enough to lower your monthly payments and allow you to stay in your home long enough to build equity and come out of an underwater loan. Speak with a mortgage consultant to find out if a refinance is the right choice for you.
Being Upside Down or Underwater can be scary, but it is not the end of your home. Stay informed and know your options. Your lender can also provide some valuable resources.
About the Author
Before opening On Q Financial in 2005, John Bergman originated and funded 450 units a year as a loan officer. He founded the company with just $1M of personal life savings—committed to his vision for building the best independent mortgage organization in the industry.View John's Profile