It is important to have a basic understanding of what an underwater mortgage is and how it affects you. First, an underwater mortgage occurs when the value of your home is far less than the amount that you currently owe. So, you are looking at negative equity and every payment that you make does not increase the value of your home. If you are looking at selling your home, it is now impossible because you owe more than it is worth (unless your mortgage is paid in full or you have paid down your home for 10 years or more). However, if you are underwater on your mortgage, there are options available that will help you out of the water and help you start saving money once again.
Where to Start with an Underwater Mortgage
First make sure you are underwater. Find out the current value of your home from the county appraiser’s office in your area. Compare the appraised value to the current principal balance you owe on the home. If the appraised value is less than the principal value, then you are underwater.
What are the Options for Underwater Mortgages?
First, you can negotiate with the bank to try to modify your current mortgage. The Home Assistance Modification Program backed by the U.S. government gives incentives to banks that modify a borrower’s underwater mortgage. A loan modification reduces the principal value owed, lowers the interest rate and reduces your monthly mortgage payment. If approved, it will take your loan out of underwater status. Please keep in mind that banks are not required to give you a loan modification. You have to apply for the modification as you would with any purchase or refinance transaction. However, the banks are usually willing to work with you if your mortgage is underwater.
This is an option if you do not want to stay in the home any longer because you are underwater. You may feel you are wasting money with every payment you make because your home is worth far less. If this is the case, then talk to your bank about a short sale prior to you defaulting on your home loan. This option allows you to work with the bank to sell your home on the open market at a selling price that is less than the current principal balance. If approved, new buyer’s actually purchase the home and obtain the title to the home. For you, you are saving money because you are no longer obligated to the monthly payment, plus you no longer pay into a negatively valued asset. As you can see, there are options available.