Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
What Is An Underwater Mortgage?
When a home purchase loan has a superior principal than the free-market value of the home then it is an underwater mortgage.
When the property values are falling that is when this situation can occur. The homeowner may not have any equity available for credit in case of an underwater mortgage.
In an underwater mortgage, unless a borrower has the cash to pay for the loss out of their pocket they can be prevented from refinancing or selling the home.
Breaking Down An Underwater Mortgage
Among homeowners during the peak of the 2008 financial crisis, which along with other issues, led to a substantial deflation in housing prices underwater mortgages were a common problem.
Even supposing the market has very much recovered because of the support from monetary policy and interest rate stabilization when making a real estate investment underwater mortgages are yet a factor that property owners must follow closely.
When the value of the home is less than the original mortgage principal that is the time when a mortgage is considered underwater.
Based on the declining value of the home since its purchase, there is a possibility that the borrower may have no equity or negative equity.
Equity on a home is related to the value of the home against the balance paid.
If a borrower’s home value is $325,000 and he has a mortgage of $350,000 then it is considered to have an underwater mortgage.
If half of the principal on their mortgage loan has been paid by the borrower and the principal balance is $175,000, then they still are considered to have an equity of $150,000 that the borrower can take advantage of in a home equity loan.
The Great Depression
The economic crisis of 2008 had a severe impact on the U.S. economy. One of the effects was a bursting housing bubble which collapsed the values of real estate property across the market.
The primary cause for the housing value deflation was slack lending standards by the lenders providing broader mortgage loan approvals.
Especially loose lending to subprime borrowers resulted in a huge number of defaults and foreclosures further affecting real estate property values across the country’s market.
Leading to a collective uncommon scenario that caused losses for borrowers across the market whose home’s fair market value was much lower than their mortgage loan.
Eventually, the implementation of monetary policy by the Federal Reserve helped the American economy to bounce back and housing prices to recover.
Following the crisis, the mortgage payment burdens were reduced due to the lower interest rates, and the demand for real estate increased.
Assessing Home Value
The Dodd-Frank legislation gave new market initiatives aiding in improving mortgage lending standards, it is not likely that homebuyers will again see the substantial real estate price drops that occurred in 2008.
However, the great recession did bring about a new sense of market realization and caution across the housing market investing.
Lenders now are more cautious while approving the mortgages and homeowners are now more prudent about the mortgage debt they take on.
Even with a new outlook on the market, it is important that the homeowners closely follow home values and avoid underwater mortgage risks.
A homeowner may choose to have the property appraised annually so they maintain a good understanding of a home’s value.
Regular appraisals can also be done by borrowers to calculate property taxes.
An appraisal value depends on various factors like the national market trends, sales of similar properties recently in the area and neighborhood, and also on the individual home’s amenities.
To maintain a high home value homeowners can also work on their homes by doing regular repairs and makeovers.
How Does A Homeowner Identify If They Have An Underwater Mortgage?
It isn’t complicated to figure out if they have an underwater mortgage when they follow these three simple steps:
- find out how much they owe on their mortgage. Which can be found on a recent mortgage statement or their online account. If they can’t find it, they can get in touch with the company that holds their mortgage loan.
- Determine how much their home is worth. They can talk to an experienced real estate agent in their area. For a more concrete figure, they can hire an appraiser.
- Subtract the amount they owe from their home’s current value.
Different Options To Get Out Of Underwater Mortgage
One can get out of underwater mortgage when:
- A homeowner stays in their home and works towards building more equity.
- Refinance their mortgage.
- Sell their house and use the savings to pay the amount they still owe.
- Sell their home through a short sale process.
- Foreclose on their home.
- Declare bankruptcy.
Conclusion
When one owes more on their home than it’s worth then it is called an underwater mortgage.
Knowing you’re underwater on your home and worried that your home value is dipping and on top of that, you’re drowning in unaffordable mortgage payments, you can get through this, by reaching out to a trusted real estate agent who can help you determine your home’s value.
They can help you know the current market conditions and how long it could take for your home value to increase.
