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What's an Underwater Mortgage
Should you read the news at all, you've probably seen the word "underwater mortgage," but are you aware what that means? Whenever a mortgage is underwater, it means that the homeowner owes more on the mortgage than the home is actually worth.
That's not designed to happen. In fact, from roughly 1990 to 2006, no one seriously thought that underwater mortgages were ever likely to be a big problem. We all believed that housing prices would certainly keep rising and that we could count on our building equity to provide us all the other cool things we wanted. Like fancy cars, a brand new deck, or perhaps a guaranteed retirement.
Welcome to reality! What happened instead is the fact that mortgage lenders got pushed into writing more mortgages to more people through the federal government in the 1990s, the banking industry got greedy. Mortgage brokers wrote increasingly questionable mortgages for those who obviously wouldn't be in a position to afford their debts.
They created ARMs, a mortgage product that offers a sweet low rate up front rate of interest, however resets to reflect inflation after 1-7 years, depending on the terms you got, and keeps resetting every year next.
And guess what happened? Exactly! Those bad mortgages started going bad in droves starting in 2007. Simultaneously, the mortgage brokers had sold those mortgages in bundles with false labeling, so the businesses that committed to those mortgages suddenly started losing money give fist.
And, voila! We'd the recession and near-financial collapse of 2009.
You know what else happened? Suddenly there is a glut of homes available on the market all the foreclosures that happened once the people who got those bad loans couldn't pay them. What happens when supply goes in place? Demand falls way down-and so do property values.
Add 10% (or 17%, should you know how the federal government isn't demonstrating accurate unemployment numbers) unemployment into the mix, and what we should dress in our hands now's chaos in which a quarter people homeowners have underwater mortgages-and one inch ten of them owe 25% more than their houses are worth!
Clearly this is a tough situation for homeowners who need to decide whether or not this makes more sense to keep paying on their underwater mortgage in order to strategically default, just as any company does when it is confronted with an underwater investment.
It's a hard situation for neighborhoods when houses are getting boarded up and trashed due to foreclosures-which just drags property values down more.
And it is hard for city governments as they are losing all that tax revenue from property taxes.
But if you're dealing with an underwater mortgage, the first people you have to look out for are yourself and your loved ones. If you decide to leave and strategically default in your mortgage, you can wind up remaining in your house rent-free for possibly as much as 2 years.
By doing this everyone wins just a little. You keep maintaining the home therefore the mortgage company doesn't have to. You may need to keep paying the taxes during that time, but that can help keep city services going. And your neighbors won't need to take popular on their own property values while you're waiting out your default period. You may even have the ability to negotiate a short sale together with your lender so the home is never empty!
And while you're remaining in your home payment-free, it can save you up for your life after your foreclosure or short sale. Quite simply, you will not be throwing a nice income after bad.
In a nutshell, then, an underwater mortgage presents homeowners with tough decisions. That's not to totally win here. But you could possibly get out with much of your finances intact and become a little assistance to other people and community while you are doing it. So, really, if you're within an underwater mortgage this is not a life-or-death situation-unless you let it be one.
