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What's an Underwater Mortgage
If you read the news whatsoever, no doubt you've seen the term "underwater mortgage," but are you aware what that means? Whenever a mortgage is underwater, it means that the homeowner owes more on the mortgage compared to house is actually worth.
That isn't supposed to happen. In fact, from roughly 1990 to 2006, nobody seriously thought that underwater mortgages were ever going to be a large problem. All of us thought that housing prices would just keep rising and now we could rely on our building equity to provide all of us the other cool things we wanted. Like fancy cars, a brand new deck, or a guaranteed retirement.
Welcome to reality! What went down instead is that mortgage lenders got pushed into writing more mortgages to more people through the federal government within the 1990s, the banking industry got greedy. Mortgage brokers wrote increasingly questionable mortgages for people who obviously would not be in a position to afford their debts.
They created ARMs, a home loan product which provides a sweet low rate up front rate of interest, however resets to reflect inflation after 1-7 years, depending on the terms you got, and keeps resetting each year next.
And you know what happened? Exactly! Those bad mortgages started going bad in droves starting in 2007. At the same time, the mortgage brokers had sold those mortgages in bundles with false labeling, so the businesses that committed to those mortgages suddenly started losing money hand over fist.
And, voila! We had the current recession and near-financial collapse of 2009.
You know what else happened? Suddenly there was a glut of homes available on the market from all the foreclosures that happened once the people who got those bad loans couldn't outlay cash. What happens when supply goes way up? Demand falls way down-and so do property values.
Add 10% (or 17%, should you understand how the government isn't showing you accurate unemployment numbers) unemployment in to the mix, and what we have on our hands now is chaos in which a quarter people homeowners have underwater mortgages-and one inch ten of them owe 25% a lot more than their houses count!
Clearly this is a tough situation for homeowners who require to decide whether or not this will work better to help keep paying on their underwater mortgage in order 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 due to foreclosures-which just drags property values down more.
And it's hard for city governments as they are losing all that tax revenue from property taxes.
But if 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 leave and strategically default in your mortgage, you could end up staying in your home rent-free for possibly as much as 24 months.
This way everyone wins a little. You retain maintaining the home so the mortgage company does not have to. You may need to keep paying the taxes during that time, but that helps keep city services going. And your neighbors won't need to take a hit on their property values while you're waiting out your default period. You may even be able to negotiate a brief sale together with your lender so the home is never empty!
Even though you're staying in your home payment-free, you can save up for your life after your foreclosure or short sale. Quite simply, you will not be throwing a nice income after bad.
In a nutshell, then, an underwater mortgage presents homeowners with tough decisions. No one is going to totally win here. However, you could possibly get by helping cover their most of your finances intact and be a small help to your neighbors and community while you're doing it. So, really, if you are in an underwater mortgage this isn't a life-or-death situation-unless you let it be one.
