Being underwater with your mortgage loan means your home is now worth much less than its original value.
Say you purchased a home worth $200K. After paying the first few mortgage installments, you find out your home is now worth less than $100K.
Your mortgage is now underwater and you’re, figuratively, drowning in debt!
The common problem that peaked during the real estate market crash a few years back is still affecting millions of homeowners today.
“In fact, most of the U.S. housing market has not recovered from the epic crash of the last decade.” (source).
The bad new is, being stuck with an upside down loan isn’t ideal.
Many were forced to sell their homes over the years, much under market value. Others were (or still are) making huge sacrifices to keep afloat and not lose the roof over their heads.
The good news is, there are ways to attempt to solve your problem and avoid losing significant sums of money in the long run.
Underwater Mortgages Explained
Problems & consequences of underwater mortgages
Underwater mortgages can cause certain serious problems, each followed by specific consequences.
Difficulty selling your home – Often times, many are forced to sell their homes since they can’t afford paying the mortgage any longer.
If your mortgage is underwater, you’ll want to cover most of the amount still owed after selling!
If the balance owed is much higher than the selling price, you’ll only be covering part of the remaining mortgage loan and still have to pay the rest of it yourself. This is in addition to losing your home.
Risk of foreclosure – Difficulty paying the mortgage and being unable to sell could lead to an unwanted foreclosure.
You’d have to give up your home and allow the bank to sell it under their terms.
You’ll probably be asked to pay for the difference anyway if the bank sells it for less. Your credit score will drop significantly and you should expect to lose a lot of money in the process.
Foreclosure is probably the worst consequence that comes with being unable to pay for an underwater mortgage.
Difficulty to refinance – Although not impossible, refinancing an underwater mortgage is going to be quite difficult.
Since your home’s value is below the market, you won’t see lenders jumping for joy when you ask them to redefine your loan’s terms.
The banks need some kind of leverage to prevent their losses. If your home’s value isn’t enough, finding a way to refinance is going to pose difficulties.
Dealing with underwater mortgages: possible solutions
It’s only normal to look for a way out when your mortgage goes underwater!
Here are some possible scenarios. Each comes with bigger or lower financial losses, depending on the circumstances.
Keep paying your mortgage – Although you’re clearly losing money, you could just keep paying your mortgage, like nothing changed.
After all, you bought your home for a reason. You chose it carefully. You (ideally) applied for a loan you knew you could afford over the next few decades.
So, even if your mortgage is underwater, this is your own, personal home you’re trying to keep. First solution would be to just keep going.
Refinance your mortgage – Although difficult, for the reasons explained earlier on, it’s still a possibility for you to lose less money in the long run and keep your house.
Attempting to refinance your mortgage should be the next best thing, if you can’t afford to keep paying your current installments.
Of course, not everyone can qualify for refinancing, but looking into it can’t hurt. Obtaining a lower interest rate can be of great help in the long run!
Rent your home – Become a landlord. Finding tenants to pay you rent could help pay for the rest of your mortgage loan.
You could either move out (back with your parents / downsize and rent a cheaper home or apartment) or just rent space you don’t need (like an empty room, your basement or even your garage).
It’s not easy finding good tenants, but it’s something to consider if you need financial help.
Short sale – Although not all lenders are in favor, you could attempt a short sale to cover your remaining loan with less than than you owe.
You’d still be losing money, not to mention you’d be losing your own home, but at least you can wipe out your remaining debt if the bank agrees to it.
Declare bankruptcy – Although not ideal, declaring bankruptcy could help you get out of a difficult underwater mortgage situation.
If you’re behind on payments, bankruptcy could help you ‘catch up’.
You could postpone foreclosure if you manage to get a loan modification.
Also, you could attempt to eliminate other debts you have, so you can redirect the money towards your mortgage and keep your home.
Beware of bankruptcy consequences though. They will affect you for quite a long time!
Tips to make sure your mortgage won’t sink underwater
To avoid an unpleasant underwater mortgage situation, here are a few tips that may help.
Research other property values before buying – When deciding where your future residence will be for the next decades, make sure you check out other property values in the same area.
Don’t be tempted to buy immediately. See what other properties are worth and avoid hasty financial decisions.
Shop around for the best mortgage rates – A common mistake many future homeowners make is not taking the time to shop around for the best rates.
It may be easier for you to be loyal to the bank you’ve worked with for years, but familiarity shouldn’t be a factor when it comes to mortgage rates!
Avoid reckless mistakes – Since you’re probably not related to Nostradamus and can’t see into the future, it’s difficult to predict whether or not your mortgage will go underwater.
To dodge any unpleasantries, make sure you avoid the most common mistakes many make when buying their first home.
Have you ever been in such a difficult situation?
What helps most when your mortgage is underwater?