There has been a lot of talk about houses being under water over the last few years since the real estate market went bust. Today I want to talk about just what under water means, and what it means for you.
What Does Under Water Mean?
The term under water (synonymous with the term upside down) simply means that you owe more on your mortgage than the house is actually worth.
Unfortunately, for the millions of homeowners who are upside down on their home, they know all too well that it’s not nearly as fun as hanging upside down from the monkey bars on the playground.
How Do You End Up Owing More than Your House is Worth?
So how do so many end up owing more than their home is worth? Sometimes, it's simply because you didn't do your research and overpaid for the house. But more often, it's one of the following scenarios:
You Got a Terrible Mortgage
If you got a mortgage that required little to no down payment, you started out with no equity in the home. It's likely that you're paying off the interest first before any equity gets paid. Therefore, it can be years, even over a decade before you build any equity. The result is, you owe more than the house is worth for many years until you start building equity on the tail end of the loan.
You Got a Home Equity Loan
This is probably the most popular reason why homeowners end up upside down on their mortgage. Maybe you were trying to pay off some debt, or maybe you wanted money for home renovation, so you went to the bank and got a home equity loan.
Now, in addition to your mortgage, you owe a chunk of money on your home equity loan too. In this scenario, it's extremely easy to owe more than your house is worth. Combine a home equity loan with an zero down payment or interest only mortgage, and you have a recipe for disaster!
What To Do If Your House is Underwater
So now that you understand how it happened, what can you do if your house is under water? Here are four things that can help you if you’re stuck owing more than the house is worth:
- Strategic Default- A Strategic Default means you default, or walk away from the mortgage and give the house back to the bank. Some people do this even if they can still afford the payment. This leaves the bank to sell the house to get whatever they can for it. But you’re not off the hook! You take a big hit on your credit score, and the bank will eventually hunt you down for the remainder of the money. In addition, the spiritual implications of not living up to your word is something you should consider as well.
- Short Sale- A Short Sale means you got approval from the bank to sell the house for less than you owe on it. Some banks are allowing people to do this if they have missed mortgage payments but are not in foreclosure yet. A short sale allows you to avoid foreclosure and keeps the bank from having to take over the house, which is something they don’t want to do. However, it will hurt your credit score for years to come.
- Government Programs- HARP 2.0, FHA Streamlined Refinance, and the Mortgage Settlement. The government mortgage relief programs have been overhauled to include more people and make it easier to qualify. But remember, dealing with the government may be very time consuming and complicated to get approved for participation, but the hassle factor may be worth it if you can have your principle or your interest rate reduced substantially. You can find out more about it here.
- Sit Tight- If you plan on staying in your home for years to come and you can afford your mortgage payment, you can stay put and wait for the situation to reverse itself. As you pay down the mortgage you will gain equity and, over time, home prices will rise again. These two factors working together will eventually get your head above water, probably sooner than you might think.
Take the Long View
If you have found yourself in an underwater situation with your mortgage, the first thing you should do is take a deep breath and don’t panic.
Panic and desperation will always cause you to make bad decisions that can haunt you for years to come. Make sure to consider all your options and get wise counsel that will help you determine what the best course of action is.
By all means, don’t let someone convince you that just because your home is under water, you’re in a hopeless situation. Sometimes home prices go down in value. It will recover, and so will you.
When you're having financial issues and making the mortgage payment is difficult, working your way through the process may not be easy, but it will be worth it once you’re done. Just remember to take the long view and realize that this too shall pass.
Question: Have you had any success dealing with a home that’s under water? Tell me about it in the comments.
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