What is an Underwater Mortgage?

Real Estate
on April 23, 2013

An underwater mortgage is defined as having negative equity in your home. An easier definition is you actually owe more on the principal balance of your mortgage than the actual value of your home. Currently, around 11 million mortgages in the U.S. are currently underwater. The U.S. government recognizes the problem and is working toward finding a permanent solution to the problem. One way is offering banks incentives to restructure a loan to a new principal amount with lower payments and interest rates. If you are underwater on your mortgage or you think you are headed in that direction, you must take action immediately.

What To Do First
The first step in dealing with an underwater mortgage is determining if you are actually underwater. Go to your county appraiser’s website and follow the steps to determine the current value of your home. From there, request your current principal balance owed without interest, just the original balance. When you receive the two values, look to see if the appraised value is less that the principal balance. If the appraised value is less, you are now considered underwater on your mortgage.

The Options Available
You can stay in your home if you continue to make your payments. However, the payments are made into a negatively valued asset. This means with every payment you make, the payment does not decrease the principal balance owed and remains that way for years until there is a significant recovery in the housing market. So, the choice is yours, improve your financial situation by eliminating the negative asset, or stay in the home and hope the value of the home increases dramatically.

Alleviating an Underwater Mortgage
The two most prominent programs for eliminating an underwater mortgage is a short sale or a loan modification. The loan modification is a government backed program that provides incentives to banks if they agree to rework your entire mortgage. The modification includes a new principal balance that is lower than the appraised value, a new lower monthly payment and a new interest rate. It is up to the bank to approve the modification if you apply.

Next is the short sale. Here the bank agrees to allow you to sell your home for less than the current principal balance owed. You will have to state your case to the bank and prove to them that you are underwater and losing money. If you are approved, you can place the house on the open market yourself or through a real estate agent.

Found in: Real Estate
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