Four Options to Consider If Your Mortgage is Underwater

Four Options to Consider If Your Mortgage is Underwater

Are you underwater on your mortgage? If so, do you know what your options are?

Are you like thousands of other American homeowners who owe more on their home than what it is worth? These days, it’s not an uncommon scenario with the current housing market. Fortunately, there are options for people who find themselves in this type of financial situation. Here are a few of those options to help you get through the mess the best way possible.

1. Consider Refinancing

Under the government’s Home Affordable Refinance Program, many troubled homeowners are finding the relief they need by refinancing with lower mortgage rates. And since the government is extending this program until June 2012 (it was originally scheduled to end at the end of in the summer of 2011), it is not too late to apply for this type of help. If you qualify for the program, it is very similar to a conventional mortgage loan with a few differences, the biggest being a lower rate for mortgage insurance if you have less than 20 percent equity in your home. This program is also only available for homeowners with mortgage loans through Fannie Mae or Freddie Mac.

2. Consider a Short Sale

Thousands of homeowners have benefitted from doing a short sale on their home when they are underwater on their mortgage. With a short sale, the mortgage borrower gets the lender to agree to sell the home and then forgive the remaining debt. As an example, if the borrower owed $200,000 on a home and the home was currently worth $100,000, the borrower may convince the lender to sell the home for $150,000 and forgive the other $50,000 of the mortgage debt. This is a great option if you can convince your lender to agree to it, but you also have to prove a financial hardship and exhaust all of your available resources (such as retirement accounts, savings accounts, etc.) in order to qualify for a short sale.

3. Consider a Loan Modification

A loan modification is a popular choice among mortgage borrowers who get underwater on their homes. With this option, the borrower asks their lender to modify the loan. This can include lower mortgage rates and lower payments for either a temporary time period or permanently. In many cases, the lender may extend the term of the loan so the monthly payments are lower or they might allow the borrower to pay any missed payments at the end of the loan term. Only in rare cases, however, do loan modifications result in a reduction in principal.

4. Consider Staying There

Owning a home is more than just a financial decision. Homeowners have a sense of pride that they take in their investment. There is also a sense of obligation among many homeowners to follow through with the agreement they signed regarding paying off their home. In addition, many people are emotionally attached to their home. As a result, why not just stay and pay off the balance? Even if you owe more than what it is worth, the market could increase in the near future and your home could rise in value to what it was when you bought it. Either way, if you stay in your home, you can keep making the payments as scheduled and live your life the way you’ve been doing since you signed the mortgage loan papers.

There are many decisions to make when you are underwater on your mortgage. The toughest decision may be to stay in your home either by refinancing or simply continuing to make your payments as scheduled and riding out the mortgage crisis that we are in. But there is certainly no shame in choosing to leave your home and cutting your losses. Just know what you are getting into with any decision that you make.

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  • Amy

    July 21, 2011

    I don't see strategic default as one of the options in your article. If a home has lost a lot of value and the homeowner does not expect they will be above water for years, then a strategic default may make sense. I'd first try to work it out with the bank but if the bank isn't going to budge then this a real option to consider. It may hurt credit for awhile but the savings may be worth it.

  • Brian

    July 23, 2011

    It's ridicukous in the extreme to expect people to pay upkeep on property they have no equity in any more. In some cases, it's likely that people will not have equity for YEARS due to no fault of their own. At some level it becomes a basic financial decision to stop throwing money at a money losing proposition. People forget that the banks got bailed out and that not only do we get to foot the bill for that for years to come; we get to pay profitable mortgages on unprofitable houses. Why does Joe six-pack have to keep footing the bill for this fiasco. Time for the banks to belly up and take responsibility too.

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