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What's an Underwater Mortgage

If you browse the news at all, you've probably seen the word "underwater mortgage," but are you aware what which means? When a mortgage is underwater, it means the homeowner owes more on the mortgage compared to home is actually worth.

That's not supposed to happen. In fact, from roughly 1990 to 2006, nobody seriously thought that underwater mortgages were ever going to be a large problem. We all thought that housing prices would just keep rising and now we could count on our building equity to provide us all another cool things we wanted. Like fancy cars, a new deck, or a guaranteed retirement.

Thanks for visiting reality! What went down instead is that mortgage lenders got pushed into writing more mortgages to more people through the federal government in the 1990s, the banking industry got greedy. Mortgage brokers wrote increasingly questionable mortgages for those who obviously wouldn't be able to afford their debts.

They created ARMs, a mortgage product which provides a sweet low rate in advance rate of interest, but then resets to reflect inflation after 1-7 years, with respect to the terms you got, and keeps resetting every year after that.

And you know what happened? Exactly! Those bad mortgages started going bad in droves starting in 2007. Simultaneously, the mortgage lenders had sold those mortgages in bundles with false labeling, therefore the companies that invested in those mortgages suddenly started losing money hand over fist.

And, voila! We'd the current recession and near-financial collapse of 2009.

You know what else happened? Suddenly there was a glut of homes on the market from all the foreclosures that happened when the individuals who got those bad loans couldn't pay them. What goes on when supply goes in place? Demand falls way down-and so do property values.

underwater mortgage refinancing

Add 10% (or 17%, should you know how the federal government isn't demonstrating accurate unemployment numbers) unemployment in to the mix, and what we have on our hands now is chaos where a quarter people homeowners have underwater mortgages-and one inch ten of them owe 25% more than their properties are worth!

Clearly this is a tough situation for homeowners who need to decide whether it will work better to keep paying on their own underwater mortgage or to strategically default, just like any business does when it is faced with an underwater investment.

It's a hard situation for neighborhoods when houses are becoming boarded up and trashed because of foreclosures-which just drags property values down more.

And it is hard for city governments as they are losing all that tax revenue from property taxes.

But when you're coping with an underwater mortgage, the first people you need to look out for are yourself and your loved ones. If you choose to walk away and strategically default on your mortgage, you can wind up staying in your home rent-free for possibly up to 2 years.

This way everyone wins a little. You retain maintaining the house therefore the mortgage lender doesn't have to. You may need to keep make payment on taxes in that time, but that can help keep city services going. And your neighbors won't need to take a hit on their own property values while you are waiting out your default period. You may also be able to negotiate a brief sale together with your lender therefore the house is never empty!

Even though you're staying in your house payment-free, you can save up for your life after your foreclosure or short sale. Quite simply, you won't be throwing good money after bad.

In a nutshell, then, an underwater mortgage presents homeowners with tough decisions. That's not to completely win here. But you can get by helping cover their much of your finances intact and become a little help to other people and community while you are doing it. So, really, if you are within an underwater mortgage this isn't a life-or-death situation-unless you let it be one.