Underwater Mortgage

By on March 19, 2013

$1 Trillion Homeowners Still Underwater in Mortgage Debt

Over the last year, the economy has slowly regained momentum and more than 2 million homeowners have come back from the chagrin of negative equity. In a study done by Zillow, the online real estate database, there are still 13.8 million people carrying $1 trillion dollars in mortgage debt.  While we are encouraged by the decreasing number of underwater mortgages, there are still millions of people on the long road to recovering the value of their home or exploring their options for losing negative equity.

What is an Underwater Mortgage?

A mortgage is considered underwater when the balance of the mortgage loan exceeds the market value of the home.  Real estate may be your home, but it is also an investment vehicle which becomes a debt burden when the amount you owe (financial liability) is greater than potential return on ownership (asset value).

Typically, when you buy a home, the property equity is the difference between the market value of the home and the size of the loan.  When the market value appreciates and/or the loan is paid down, the increased difference is the interest earned for your investment into capital – this money may be reinvested into the home, borrowed against, saved, etc.. But when the home depreciates in value, as we saw often during the 2008 U.S. housing bubble, owners quickly find themselves owing more than their property is worth.
For example:

  • If you purchased a home appraised at $500,000 and put a $100,000 down payment, you would need a mortgage for around $400,000.
  • After you make your first $3,000 payment, your equity is now $103,000.
  • And if your home appreciates by $10,000 before your next payment, your equity is now $113,000.

What if that same home had depreciated in value by $50,000?  The equity would have dropped by half to $53,000.  And if the depreciation trend continued, the homeowner could easily find themselves several thousand dollars over their original $400,000 loan debt and they are underwater.

The Problem with Underwater Mortgages

As long as you continue to make mortgage payments on your home, you will retain ownership despite being underwater.  You may not be able to refinance for a better loan rate or use equity funds for a new roof, but you have the choice to wait out market slumps in the hopes for a rebound in the long-term.  On the other hand, if you decide to (try and) sell with an underwater mortgage, you run the risk of still owing debt despite no longer having ownership of the property, opening foreclosure proceedings or abandoning the property.

What to Do When Your Property Goes Underwater

  • If you can afford to make your mortgage payments and are happy with the function of your home, then you may not need to panic about the fact that it’s underwater.  When you plan to stay for many years, the market tends to pull you above water eventually.  And if you must, explore your options.>
  • If you are having a hard time meeting your mortgage loan obligations or for some reason want to explore options for moving, then you may want to speak with a financial planner and real estate expert about short sales and short refinancing programs with your bank or other non-Federal Housing Administration (FHA) organization.
  • Some borrowers qualified for mortgages through the FHA, Fannie Mae and Freddie Mac.  Many of these borrowers qualify for the Home Affordable Refinance Program or FHA Streamlined Refinance Program which refinances,  modifies the loan interest rates, redesigns amortization schedules or may consider forgiving up-to-date loans with specific exceptions.

Whether you’re planning to stay in your home and stay abreast of mortgage payments or you are considering the advantages of short sales, bankruptcy or foreclosure, it is a good idea to consult your attorneys, insurance agents and financial planners early on so make informed and affordable decisions about dealing with an underwater mortgage.

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About Terri A. Kamoto

Senior writer for FSN - Terri is a former financial analyst dedicated to making personal finances, budgeting, investment and insurance advice accessible, up to date and easy to understand. It is hard to find professional advice written in a language someone without a financial background can understand. Terri helps companies synthesize industry lingo and expertise into clear and informative content which builds smarter, financially successful individuals. You can find Terri on !

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