How Does This Happen?
When a property decreases in value or a homeowner has missed payments the mortgage is likely underwater. These are the two main reasons this can occur. Let’s look at some specifics on both of these.
Property Value Decrease
Property values can increase or decrease depending on what the real estate market is doing. If you purchase your home for $200,000 but now due to the homeowners lowering their selling price, your home is only worth $150,000 and you still owe $180,000, you have an underwater mortgage. This is simply due to a decrease in property value and there is nothing you can do to change the current market situation.
Missing Mortgage Payments
Homeowners strive to never miss a mortgage payment, but sometimes there is a financial strain that can be out of our control. Missing mortgage payments can lead to an underwater mortgage. When you make your payments, a lot of the money goes towards the interest on the loan. Paying additional on the principal is what helps you pay less on interest. when you miss a mortgage payment then you haven’t played the interest for that month and it will accumulate. This interest compounds and it can make it difficult to pay back your loan which can lead to an underwater mortgage. The best thing you can do is make sure you don’t buy a home out of your price range.
When you are underwater then you do not have any home equity or you could even have negative equity. This has a few potential issues you need to be aware of.
Refinancing: If your mortgage is currently underwater you will not be able to refinance. Lenders look for you to have equity in your home before you can refinance.
If you have an underwater mortgage then you will experience difficulty selling your home. Most sellers typically use the positive balance from the sale to pay down or pay off the existing mortgage. When you are underwater, your sale will likely not cover your outstanding principal. You either stay in your home or sell and cover the cost out of your pocket. In some cases, sellers look to a short sale if they are in this position.
Potential Of Foreclosure
A homeowner with an underwater mortgage has a higher chance of foreclosure if you have fallen behind on your payments. In this case, the bank will seize your home.
This is just one of the many situations that can occur with homeownership. Ultimately you want to avoid an underwater mortgage and you can do this by making the right financial choices when considering your home budget. Aa your experienced and knowledgeable agent, I will help you find a home that keeps you within your monthly budget and considers all additional monthly costs in addition to the mortgage payment.