Is your net worth shrinking? Don’t be embarrassed if it is — unfortunately, you’re in good company. A lot of people are hurting from the decline of the stock market over the last few years, and home values are dropping as well. This is a one two punch that really hurts families all over the country, but knowing what you are dealing with is half the battle, right?
Right. Currently, the statistic going around is that one out of every six homes are underwater. This means that the homeowner owns more on the home than the home is actually worth.
Welcome to the world of negative equity, though there’s really nothing positive about it. If you have the money to continue paying your mortgage payments, you’re going to be able to at least continue living there — but you pretty much enter the same situation you had when you were a renter. Even though you technically own the house, you don’t build anything. So essentially, you’re throwing your money down a hole, with the only reward being that you don’t get thrown out on the street or have a sheriff deposit your belongings out on the curb. Not having anywhere to go is going to be a rather interesting exercise, but it’s one that you can avoid.
Let’s look through a classic problem through the eyes of a fictional family trying to get by. If the Jones family are making payments on a house that has lost 30% of its value through the last three years, they’re in a world of trouble. As mentioned before, it can feel a lot like living in an apartment when you have negative equity. You don’t move backward per se, but you really don’t move forward. You have to hope that your home is going to rise in value again, but this can be pretty hard to deal with. Nobody wants to wake up and find that they can’t move out of such a terrible situation.
So, what options does the Jones family really have? A few more pieces of information would be needed:
We assume that in this family, there is a husband and wife — Tom and Jane Smith, who are in their late 30s. They are current on the mortgage payment, which often means that they can’t explore any loan modification options, though not always. There are is a child from a previous marriage, and Jane is pregnant with their second child. Jane purchased a nice two-bedroom/two-bath condo in Florida for 225,000, which sounded like a good deal. However, right now the market is just not good, and they need to move into a place that has a lot more space than what they have at the moment. This makes life pretty hard to deal with — they have to sell but they can’t seem to get the right price for their home.
They’ve already reduced the price down to 199,000, which is a significant drop.
Yet that’s the trouble that homeowners are coming into — this is not a seller’s market at all. The buyers know that they have the power here, which means that they can make ridiculous offers — rather, what would be ridiculous in a high demand seller’s market — and get those offers filled in a hurry. Sellers aren’t having a lot of options other than to sell.
If you have a fixed rate mortgage, negative equity is something that hurts, but you can deal with it — your payments aren’t changing. Yet if you have an adjustable rate mortgage, it’s the same pain — but worse. Your mortgage will hold stable for five to seven years and then adjust. A lot of things can happen in five to seven years. This is something that you might realize later after things have gone sour. Jobs that you thought would come through don’t, and pay raises that you thought you would get don’t go through either. So you have to make sure that you’re balancing all of these things against actually being able to live in the house and prosper.
But it’s really too late for that — we’re talking about negative equity, and what you need to do.
What most financial planners think you should do in the light of negative equity is straightforward, but very messy.
You will need to sell the upside down house for as much as you can get for it. You will still be on the hook for the mortgage, but it might be a smaller set of payments than what you had previously. This can definitely help people dealing with adjustable rate mortgages. After all, interest is a matter of percentages so you need to ensure that you’re thinking about this.
If you’re in the market to buy a new property, the assumption is made that your credit is still decent. You will have to try to manage the weight of two mortgages, and this really isn’t a good idea. Also, if you have enough money for a down payment, you are better off using that to get another property to live in.
Staying in the home and riding out the market can be a solution worth looking into, but it has its own set of risks as well. If you stay, the house can decline further in value. This tends to be problematic for people that really want to be able to enjoy a larger space than what they have. However, there is a point where you just have to be happy that you have a roof over your head for the moment.
Most financial planners are against walking away from the house and just mailing back the keys. This is because you lose all negotiation power — you can’t do anything else after that except leave and hope that you have a soft spot to land. If you’re going to strategically default on your home, you need to make sure that you save up the money you would have paid on the mortgage for somewhere to live. You might have a hard time getting a rental house as well — unless you go through a private lender.
There are a lot of different things that you can look into, so we hope that this guide really helps you understand the ins and outs of negative equity. The biggest thing that you need to keep in mind is that no matter how bleak life looks, there’s always a chance of improving things over time. You are just going to have to believe that things can get better and keep striving for greatness every step of the way! Good luck out there!
admin 
