If you own a home or property and the real estate market starts to dip, there is a chance that you can have an underwater mortgage.
An underwater mortgage, also known as an upside-down mortgage, is when your home or property value decreases so much that you now owe more to the bank on your mortgage than what the home is worth. There are many reasons why an underwater mortgage can be problematic for homeowners.
What Does An Underwater Mortgage Mean?
An underwater mortgage also called an upside-down mortgage, is when you will owe the bank more on your real estate property than what the property is worth. Having an underwater mortgage can be a problem for property owners, especially if they want to sell or refinance the property.
An underwater mortgage usually happens when you purchase your home when the housing prices are high, and then the economy or the property market takes a dive, and so now your home or property is worth much less than what you owe the bank for your mortgage.
Often this happens in areas where housing prices are growing at enormous rates monthly or yearly.
Example Of What An Underwater Mortgage Looks Like
Here is a fictional example of an underwater mortgage and some significant reasons your property may be underwater for your mortgage.
The two primary reasons a person’s mortgage is underwater are a decrease in property values and missed mortgage payments.
Examples Of Decreased Property Value And Underwater Mortage
Let’s say that you purchase a home for 300,000 USD. The bank comes in and values your home and property for 300,000; as you put 40,000 down on the house, the bank gives you a loan for 260,000 USD.
A few years later, you notice that all your neighbors have a problem selling their homes at 300,000 USD and have to lower their prices. Since you purchased your home, the housing values have been increasingly falling, and the economy has dived. On top of that, interest rates are at an all-time high, so fewer buyers are in the marketplace.
Thanks to this decrease in the market and drop in housing, your home are now assessed to be worth 200,000 USD, but you still owe 230,000 USD to the bank for your mortgage. In this instance, they would say that your mortgage is underwater as you now owe more for your property than it is worth.
Examples Of Missed Payments And Underwater Mortgage
Let’s say that you buy a house for 240,000 USD at a mortgage rate of 4% APR, Each month, your monthly payment is 1,590 USD.
When you start to pay off your mortgage, you are not paying off the principal but instead paying off the interest for the property. Each month you are paying off only about 600 USD toward the principal for your house, and the additional 990 is going toward paying off the interest.
The additional amount will accumulate interest at the 4% APR if you miss a monthly payment. If you pay it off the following month, it will help, but if you allow the payments to drag on, you will quickly find that you are underwater with your mortgage.
If your interest rate is high, it also means that your interest will be higher, and you will pay more interest before you pay off any of your principles.
That is why you must not purchase the property where you can not afford the monthly mortgage payments, as you are not paying off the principal as much as the interest amounts.
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Problems Of Underwater Mortgages
One of the significant problems with an underwater mortgage is that you do not have equity in the home. Either the lack of equity can cause you some additional problems.
Difficult To Refinance Your Payments
Let’s say that you buy your home when interest rates are also high, so you want to look to refinance your home. Most lenders want to see that you have some home equity before refinancing it.
That is why it can be difficult to refinance your home if your mortgage is underwater.
Difficult To Sell Your Home
Selling your home can also be challenging if you are underwater on your mortgage. Most people will use the balance of the sale to pay their mortgage when selling their homes.
If your home is now worth less and you owe the bank more than your home is worth, then you need to come up with savings to pay off the rest of your mortgage before selling your home.
This leaves you with a few basic options. One is to stay in your home until you have more equity.
The other is that you sell your home and make up the rest of the payment from your savings.
Another potential option may be to try to short-sale your home. A short sale means the mortgage lender receives all the payments, forgives the difference, or makes a judgment. A short sale will hurt your credit standing and ability to repurchase the property.
High Potential For Foreclosure
With an underwater mortgage, there is a potential that your property will go into foreclosure. A foreclosure will occur when you cannot make the payments on your property so that the bank will seize the property.
For many people underwater on their mortgage, foreclosure may be their primary option.
The home’s value can go up and down when purchasing a property. That is why it is crucial that you not only buy what you can afford but also do not purchase a property at an all-time high so that you end up with an underwater mortgage.
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