This new real estate ‘technical’ term underwater is getting quite a bit of press lately, and unfortunately it applies to a lot of us. What it means is “my house is no longer worth as much as I owe on it.” It means your equity is gone, and it also means that you can’t easily sell the house and pay off the loan if you want to move. Truly an unpleasant situation.
Just for some rough numbers on the scale of the problem: there are about 110 million households in the U.S. Of that, about 70 million are in owned homes, not rentals. Of that 70 million homes, about 30% are owned outright – no mortgage. Of the roughly 50 million homes with a mortgage, about 25%, 12 million or so are under water.
But you probably don’t care near as much about the other 11,999,999 mortgage holders as you do about yourself.
In this series of articles over the next few days I’ll outline what some of your choices are, and what they might mean to you. Here’s the topics, and the options:
- Sit Tight
- Loan Modification
- Short Sale
- Deed in Lieu
- Strategic Default
Please keep in mind that I am a real estate agent, not an attorney. I know about this stuff because I’ve dealt with it quite a bit, and I have a fair amount of training on it. But if you need specific legal advice, consult your attorney, and if you need specific tax advice or financial advice, consult your accountant or your financial advisor. And if you don’t have any of those people in your pocket, I can help you find them. Now, here's the first article:
Option 1: Sit Tight
When you bought your home, the monthly payment probably seemed affordable, and a fair price to pay for the place you wanted to live in. Unless your financial situation has changed, it probably still is. Or unless you got one of those adjustable rate mortgages like an Option ARM which is now biting you. But if you are only a little bit underwater, and you can still afford the payments, you may want to just Sit Tight.
If you are insolvent, meaning you can’t make the payments, and don’t have enough savings to make up the difference, then the Loan Modification, Short Sale or Deed in Lieu options may be available to you, and Foreclosure is the worst case scenario.
If you are not insolvent, then you can Sit Tight, or you can consider a Strategic Default, which is really a voluntary Foreclosure path, painful but practical sometimes.
If you Sit Tight, you may come out of this situation pretty well in the long run. Historically, inflation carries the prices of homes upward, and if we get a bout of serious inflation, as we did in the 1970’s (ask your folks what they paid for their house in the early ‘70’s), you’ll be paying back an ever smaller looking mortgage with very cheap dollars, and accumulating some serious-looking equity. Here’s some thoughts on interest rates. I don’t think we’ll start that inflationary run right away, but there are some pretty smart people who say the smartest thing you can do right now is buy a big sound asset with a low-rate long-term fixed-rate mortgage. For an idea of what might happen to the real estate market in the nearer term, see Predicting the Housing Market Recovery for some projections of the housing market by Moody’s Investor Services. Articles on the rest of the options coming soon :-)