When you owe more than your house is worth!
Since equity is the difference between the value of your home and what you owe on the mortgage, negative equity is when the value of your home is less than the amount you owe on the mortgage! This is an unfortunate, but extremely common situation for families throughout the country. In fact, First American CoreLogic says that almost one-quarter of those who have a home mortgage in the United States are affected by negative equity. Negative equity is also referred to as being “underwater.”
Some people argue that it makes no sense to continue to stay in the home, even if you can afford the payments, because you are paying and investing in a hopeless entity – the home will not spawn any monetary value to you should you sell the home in the near future (because you owe more than what the home is worth). For those who are underwater and cannot afford their mortgage payments, some walk away from their homes – they stop paying their mortgages until the home goes into foreclosure. While this is not an advised approach, it is morally not right and it will ruin your credit score, it is becoming more of a common occurrence to those who are underwater and cannot afford their mortgage payments.
What do you do if your home is underwater?
First you want to make sure that your home is appraised correctly. Many times people assume they are underwater. Be sure to double check that! If you are definitely underwater, there are several options. First, contact your lender immediately – don’t wait! Explain your situation to your lender. See if your lender is willing to do a loan modification (as explained in our other Real Estate article towards the bottom of this page), where you and your lender agree to new terms on the mortgage. Loan modifications are difficult to get and they are available usually to a certain income. But definitely call your lender and try!
Short sales are the other option (as explained in the article below). This is where you sell the home at the market value, and whatever other money you owe to the lender, is absolved. Let’s say you sell your home near the market price of $100,000, but you owe $175,000 on the mortgage – that $75,000 (the difference between what you owe and what the house sole for) is absolved. Basically you sell the home and walk away with nothing, but you also owe nothing!
You have to take action when faced with negative equity, especially if you can’t afford the monthly payments. Read our “Foreclosure Facts” article below for even more information.
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