Are you facing the challenge of owing more on your home than its current market value? If the answer is yes, you’re dealing with what’s commonly known as an underwater mortgage.
This situation can be particularly frustrating for homeowners, especially when contemplating selling the property or pursuing a refinance.
Let’s delve into understanding what an underwater mortgage entails and explore the factors that can lead to this predicament. Additionally, we’ll provide some valuable tips on how to navigate and manage an underwater mortgage.
What Does Underwater Mortgage Mean?
An underwater mortgage, often referred to as an upside-down mortgage, occurs when the outstanding balance of a home loan surpasses the current value of the property. This situation arises when property values decline, but the borrower is still obligated to repay the initial loan amount.
It’s worth noting that mortgages aren’t the only loans susceptible to going underwater. Auto loans, motorcycle loans, and houseboat loans can also find themselves in similar circumstances.
How Does an Underwater Mortgage Happen?
There are two primary ways in which mortgages end up underwater: a decrease in property value or missed payments.
*Decrease in Property Value:*
Imagine purchasing a home for $200,000, securing a loan of $160,000 after making a $40,000 down payment. A few years later, due to a decline in property values in the area, your home is now appraised at $120,000, but you still owe $155,000 on your mortgage.
*Missed Payments:*
Underwater mortgages can also result from missed payments. As you gradually chip away at the principal balance through mortgage payments, failing to address the interest one month can lead to the accumulation of compounded interest, making it challenging to catch up and potentially putting you underwater.
**The Challenges of Underwater Mortgages**
Having no equity or negative equity in your home can pose several challenges, from difficulties in refinancing to the risk of losing your property.
*Refinancing:*
Refinancing becomes a roadblock when your mortgage is underwater since most lenders require a certain level of equity before considering a refinance.
*Selling:*
Selling your home may become problematic as the proceeds from the sale are typically used to pay down the existing mortgage. If your loan is underwater, you might not receive enough funds from the sale, leaving you with the options of staying in the home and continuing payments or exploring alternatives like a short sale.
If selling is your best option, get my FREE Guide for Homeowners which details how to sell your home even if your mortgage is underwater.
*Potential of Foreclosure:*
Underwater mortgages increase the likelihood of foreclosure, especially if you struggle to make payments and cannot refinance.
Is My Mortgage Underwater?
The simple answer is, do you owe more against your home than it’s current value? If you’re uncertain about whether your mortgage is underwater, here are some indicators to help you assess the situation:
* Falling Local Property Values: Check real estate databases or consult local experts to gauge property values in your area. Compare this with your remaining loan balance to identify disparities.
* Low Appraisal: An independent appraisal can provide a more accurate estimation of your home’s value. If the appraised value is significantly lower than your loan balance, you may be underwater.
* Falling Behind on Payments: If you’ve fallen behind on mortgage payments and local property values are stable, there’s a chance your home is underwater.
Options for Homeowners With an Underwater Mortgage
Fortunately, there are avenues to address an underwater mortgage:
*Relief Refinance Program:*
Explore programs like the Freddie Mac Enhanced Relief RefinanceSM, designed to help reduce mortgage rates or modify interest structures for homeowners who don’t qualify for standard refinancing.
*High Loan-To-Value Refinance:*
Consider Fannie Mae’s high loan-to-value (LTV) refinance as an option to change loan terms even if you owe more than the home’s value.
*Short Sale:*
In challenging financial situations, a short sale can be an alternative to foreclosure, where you sell your home for less than the mortgage amount.
If selling is your best option, get my FREE Guide for Homeowners which details how to sell your home even if your mortgage is underwater.
If you find yourself owing more on your home than its current value, you’re dealing with an upside-down mortgage. While not an ideal situation, there are viable options available.
I VOW to help as many homeowners avoid losing their homes as I can possible. I always work with a HELP first, profit last motto.
Reach me for a FREE consultation and conversation as to what has worked for others in a similar situation as you.