Purchasing a home is a significant investment. When values decline, homeowners can be left devastated with an underwater mortgage.
What Does It Mean to be Underwater?
You are underwater if you owe more on your home loan than the home is worth. Your home loses value due to declining property values. Unfortunately, you must continue to pay the home mortgage for its initial value unless you take steps to mitigate it.
Why do Property Values Decline?
Home values decline when the economy declines. When the economy falls, people lose jobs and income, making them less likely to buy homes. Therefore, a decline in home buying leads to a reduction in home values.
Other declines occur based on changing neighborhood demographics, like when businesses close in one area and rebuild in another. Homebuyers want homes closer to the consumer industry with newer stores, restaurants, and jobs.
The presence of fewer homebuyers reduces the value of homes that remain on the market. If the average home in your area is selling for less, your home value may decrease.
How Do I Know If I Am Underwater?
Compare your mortgage balance with the current value of your home.
Request a payoff statement from your lender. Include the principal balance, interest, taxes, and other loan balances such as home equity loans.
Review real estate websites and compare the recent sale prices of homes in your area with similar square footage and amenities. If the average sale price is lower than you owe, you may have an underwater mortgage. Schedule a property evaluation through your real estate or loan company to determine the actual value of your home.
What Are My Options?
If you are not planning to move soon and have no issues paying your current mortgage, you don’t need to do anything. You can continue to make monthly payments until the market value returns to normal.
If you want or need to sell, you have a few options, including:
- Selling for the best value and owing the difference
- Refinancing to modify your current mortgage rate or interest rate
- Requesting a short sale where the lender sells the home at the best value and takes a loss on the remaining amount
Each has pros and cons.
The safest is selling and owing the difference since it does not impact your credit score.
Refinancing is challenging because you must have a good standing on your current loan. You cannot be behind or have missed a mortgage payment in the last 12 months.
The short sale will negatively reflect your credit score and make it difficult to get future credit and home loans.
Which Option Is Best?
Talk to your lender or a home loan refinancing expert if you aren’t sure. Altitude Home Loans is Tucson’s leading home loan company. Our experienced team of experts can explain your underwater mortgage options and help you decide. For more information, or to learn more about loans for first-time home buyers, contact Altitude Home Loans at 520-500-1010.