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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. An underwater or upside-down mortgage occurs when the mortgage amount is higher than the value of the home. These instances are not common, but can occur when home values decline. “Being underwater or upside down on a home, car or any other asset means that you owe more than the current value and have negative equity,” says Greg McBride, chief financial analyst at Bankrate. How homeowners land underwater
Being upside-down is much less common now than it was in the last recession. During the 2008 housing crisis, many borrowers were shocked to learn that their home was valued at less than what they had paid for it, says Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. Housing markets can be unpredictable, and there are several factors that cause home values to rise and fall, such as rising interest rates, high rates of foreclosures and short sales in your area, and natural disasters, Boies says. However, underwater mortgages usually occur during an economic downturn in which home values fall, sometimes by a large percentage. In one scenario, say Jane purchased her home for $200,000, but made a $20,000 down payment and only borrowed $180,000, Boies says. Two years later, Jane becomes unemployed, but has an excellent job opportunity in another state. She needs to sell her house and move, but learns that home values in her area have declined and her house is only valued at $150,000 — and, she still owes $176,000 on her mortgage. She is now underwater, or upside-down. In addition to declining home prices, homeowners can find themselves in this financial situation when they buy homes with little or no money down or borrow against most or all of the equity, McBride says. “Note that even a stagnant home price can leave you upside-down if you wish to sell the home soon after because the transaction costs of selling could more than offset what little equity you have,” he says. Another way to become upside-down would be borrowing secondary financing equaling more than 100 percent of the value of the home, or taking out a mortgage that would result in negative amortization over the life of the loan, adds Holly Lott, a senior branch manager at Atlanta-based Silverton Mortgage. When being underwater is risky
Being underwater on a mortgage is only a problem if a homeowner needs to sell in a short time period or wants to refinance for a lower interest rate, McBride says. Otherwise, consumers can keep making their payments and “over time can get right-side up by paying down some of the principal balance and/or seeing some appreciation in the price of the home,” saysMcBride. People who find themselves in hardship situations may find it nearly impossible to refinance for more affordable payments unless they qualify for available programs or certain types of mortgages, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based nonprofit organization. What you can do if you re underwater on your mortgage
Homeowners who find themselves underwater on their mortgage have several options. One is to stay in the home and continue to make payments to reduce the principal balance on the mortgage. “Essentially, you’re riding out the market until values take a turn and go higher,” Lott says. “During this time it would be beneficial to make on the principal balance of the loan while waiting for home values to rise.” Homeowners could also consider a to and move to a more affordable housing situation, McClary says. In a short sale, the lender must agree to accept less than the amount owed on the mortgage, making it a loss for them, Lott says. Lenders will only consider a short sale as a final option before foreclosure, and overall, it isn’t “great for the homeowner as the short sale will be reported on their credit report and they will face time frame requirements before being able to purchase a home again,” she says. Another option is to simply from the mortgage — a move called a “strategic default” — but, like a short sale or foreclosure, doing so can be damaging to your future homeownership prospects, and put you in a precarious financial situation. If you walk away, you risk harming your credit and hurting your ability to get another loan, and, the lender could even hold you liable for repaying the debt. Homeowners should obtain advice from a HUD-approved nonprofit housing counseling agency in these situations to “help identify solutions specific to your circumstances and community,” McClary says. Finally, the bank could foreclose on the home, and the homeowner could need to file for bankruptcy. Either of these options would be the absolute last resort since there are long-lasting repercussions for both, Lott says. A bankruptcy and foreclosure can stay on your credit report for 10 years, and, like the other options, limit your for several years. Featured image by JayLazarin of Getty Images. Learn more
SHARE: Ellen Chang is a former contributor for Bankrate. Chang focused her articles on mortgages, home buying and real estate. Her byline has appeared in national business publications, including CBS News, Yahoo Finance and MSN Money. Related Articles