Six Solutions for an Underwater Mortgage
When the housing bubble burst and home values plummeted, millions of Americans found themselves upside down on their mortgages. If you are underwater on your mortgage – meaning you owe more than your home is worth – you have several options. Each potential solution has its pros and cons, and some are better than others. Whatever you decide, it is always smart to work with a qualified loan officer who can explain which options offer the most benefits for your particular situation.
1. Keep Paying
Understandably, most people feel a deep sense of attachment when it comes to their homes. You celebrate milestones, raise children, and maybe even retire in the same house. After years of paying a mortgage every month, it can be distressing to discover you haven’t really made any progress at all. This motivates many people to simply stay in their house and continue making payments under their original loan terms. It is a strategy similar to treading water: You might manage to keep your head above water, but you won’t accomplish much else.
Depending on your financial situation and how much you owe, you might be able to refinance. Although this option is generally unavailable to homeowners who have significant negative equity, it is a viable solution for consumers who are current on their payments. In most cases, refinancing will not impact your credit score and can result in lower, more manageable payments. With interest rates at historic lows, it is a good time to refinance. Speak to a loan office to learn if refinancing can work for you.
3. Loan Modification
A loan modification is generally a temporary solution that allows a homeowner to either reduce or suspend payments for a certain period of time. In some cases, homeowners can lower their payments permanently by enrolling in a government-sponsored program. Because loan modifications rarely result in a lower principal, consumers usually end up right back where they started: underwater. You might lower your payments, but you will still owe more than your home is worth.
4. Short Sale
In a short sale, the mortgage lender agrees to accept a sale price that is less than the original loan. As the seller, you receive no proceeds from the sale of your home. If your lender won’t cooperate, however, this is not an option. It is also important to work with experts that can fully explain whether the short sale will impact your credit and if the transaction relieves you of any tax consequences or deficiencies.
In some cases, people simply give up and walk away. Whenyou default on your mortgage, the lender automatically starts the foreclosure process. In areas that have non-judicial foreclosure laws, this process can happen within a few weeks. Because it can have devastating long-term consequences for your personal creditworthiness, foreclosure is rarely a good option.
Bankruptcy should always be a last resort regardless of your financial circumstances. Although it gives individuals the chance at a new start, a bankruptcy will not absolve you of your mortgage obligation. You might be able to get rid of a second mortgage or a home equity line of credit, but you will still be responsible for your mortgage under current bankruptcy laws.