If you are “underwater” on your home, owing more than your house is worth, you are not alone. Right now as many as 10 million homeowners are “upside-down” in their mortgages, meaning their outstanding balances are higher than the current value of their homes. Even though many homeowners made sizable down payments and faithfully paid their mortgages each month, they can’t control the housing market. In many areas housing values have dropped dramatically, leaving homeowners with negative equity. In other cases, homeowners purchased homes with small or no down payments creating negative equity as soon as the housing markets started to decline. In another common situation, homeowners took advantage of available equity lines of credit (HELOCs) and borrowed on the equity in their homes, which evaporated with the market decline, raising their loan to value ratios above their original loans.
The states with the highest percentages of upside-down mortgages include Nevada, Michigan, Arizona, Florida, California and Georgia. In Nevada, approximately one out of every two homeowners has a home with negative equity. The average equity in a property in Nevada is only $8,000. Homes in Phoenix, Arizona are now typically selling for half of what they were at their peak value. Many homeowners are having trouble refinancing at new, lower fixed rates even with good credit and a strong payment history.That’s because, traditionally, lenders won’t loan you more than 80 or 90 percent of a home’s market value.
What Should I Do?
If you’re in this situation, do not panic. Keep paying your mortgage if at all possible. When homeowners find themselves in this situation, they often let fear rule, dreading that they have no realistic chance of ever paying off their loans. This is simply not the case. There are solutions. If you stop paying your mortgage, you will damage your credit and impede your chances of owning a home or securing lower rates on auto loans and credit cards for up to seven years.
Most importantly, determine whether you can stay in your current home a bit longer in hopes of seeing some recovery in the underlying value of your property. Many housing markets have been ground down with the higher number of distressed property sales due to foreclosures. These sales artificially and aggressively push down the normal resale prices of property. Job losses and the anemic economy also create downward price pressure on homes. Most housing experts believe that over the next 12-24 months we should start seeing some recovery in many housing markets. Time can heal many wounds in real estate. If you can hang on and keep making your payments, your situation could soon improve.
If you are having problems keeping up with your current payments, you may want to look at some of the potential loan modification programs available through your mortgage servicer.
Finally, you should research on our site to learn about your options and the steps you can take toward your best solution. Again, stay current on your loan if at all possible. Keeping your credit in tip-top shape will give you the broadest number of choices.
Will I Be Able to Refinance?
Depending on your situation, you may be able to refinance even if your home is worth less than your mortgage. The Obama Affordability Plan allows Fannie Mae and Freddie Mac greater leverage when it comes to underwriting new loans. If you qualify, you may be able to get a new, fixed rate mortgage for as much as 105 percent of your home’s current market value.
Take Action and Stay Current
Remember, you are not alone. Millions of homeowners are in the same situation. The government and lenders are aware of this and are working to implement solutions to help individuals with negative equity. Stay current on your payments, learn about the options available to you and get proactive in implementing the solution that’s right for you.