What to Do With Your Upside-Down Mortgage?

couple consulting mortgage broker about their upside-down mortgage

For any homeowner being underwater on a mortgage is not a comfortable position to be in. Underwater mortgages can occur due to many reasons, but it mainly occurs due to falling property values. Owing more on a property than its current worth can lead to a number of problems.

Problems With Underwater Mortgages

Refinancing

When you are underwater, refinancing isn’t a viable option as you have no equity (sometimes negative equity) in your home. Most lenders need you to have equity in your home for you to qualify for refinancing.

Selling

Usually, you use the money from the sale to pay off your existing home loan when you sell your home. However, being upside down on house can result in difficulty in selling your home. Moreover, you might not be able to collect enough balance to cover all your outstanding principal even if you manage to make a sale. So in this situation, you are left with two alternatives: either stay in the home and continue the loan payments or sell the property and pay the rest from your savings.

Possibility Of Foreclosure

There is a higher chance of underwater mortgages being foreclosed. A foreclosure takes place when the bank seizes your home after you’ve fallen too far behind on your loan repayments. If you’re having problems making payments and can’t refinance, you might be forced to foreclose.

What to do if Your Mortgage is Underwater

Underwater mortgage doesn’t have to mean the end of the world. Although things didn't play out the way you anticipated when you initially purchased the home, you can get back on track or at least reduce the financial fallout. Here’s what you can do when your mortgage is underwater:

Stay Put

The trends in investor attitude and economic and market conditions leave home values subject to change. If you can afford to continue loan repayments, waiting it out is the least troublesome and best way to reverse the upside-down mortgage. Typically, the market will rise again eventually; you simply have to determine if you’re willing to wait and for how long.

Short Sale

In a short sale, your property is sold for its current value or sometimes even less. The return from the sale is used to pay off your loan balance, and the remaining balance is usually forgiven in return. But not all lenders provide this alternative, and bear in mind that a short sale will substantially impact your credit history. So we urge you to talk with a financial professional before coming to a decision. Short sales, like foreclosures, must always be considered a final step.

Make Extra Payments

If you have extra money available, utilizing them to pay down the debt faster may make more financial sense as this will lower your balance and increase your equity quicker. Doing so may bring flexibility as you won’t need your lender’s permission to sell if and when you need to.

Rent Your Home

If you couldn't sell your home because of negative equity, try renting it out until the market recovers, or you build some positive equity. You could rent out a room in the house or relocate to more affordable space and sublet the entire property.

Enhance the Value of Your Home

Another method for raising your equity in a home is by increasing its value. There are many ways you can add value to your home, although always be mindful that the improvements you make are affordable and don’t put you into further debt.

Refinance

If you’ve been borrowing at a high interest rate, it will make sense to refinance to get a better deal. Your payments will be less every month if you qualify for a lower rate loan. Consequently, your payments could lower your debt much quicker, which may get you back above water. Regardless, refinancing with negative equity is much more complicated. Lenders cannot lend you more than the property’s worth, so you may have to pay the rest out of your pocket.

Bottomline

Underwater mortgage incites financial uncertainty, which can be scary. The most effective way to minimize the probability of finding yourself upside down or underwater is to choose the smallest mortgage that you can find and pay it off as soon as possible. This means purchasing a property that you can actually afford rather than buying a property that you feel you want. Always speak with a financial professional if you do find yourself underwater.

You can talk to us! Our experienced mortgage brokers can offer you valuable information to help you decide your next step. Call Today!

Author:

Kiran Thapa

Seema Lama

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