Underwater On Your Home? Your Six Options

by Gerri Detweiler on 07/11/2011

In this series, I detail six possible ways to deal with an “underwater” home—one that’s worth less than the amount of money owed on it. Here is the first part of my six-part series.

Javier Gonzales is still legally a homeowner. But when people ask him if he owns a home, his first instinct is to say “no,” he says. He’s still paying the association fees and insurance on the townhome he bought in 2007, but he stopped paying the mortgage nearly two years ago, and he no longer lives there. “I don’t care about it, I don’t want it,” he says. Gonzales owes about $476,000 on a home worth roughly $263,000.

Gonzales is just one of millions of homeowners whose homes are worth less than they owe on them. Just under 23% of all residential properties with a mortgage were in negative equity, a.k.a. “underwater,” at the end of the first quarter of 2011, according to CoreLogic, an information and business services firm. Across the country, the amount these homes were underwater averaged $65,000, though in some states that figure was much higher; $129,000 in New York and $93,000 in California, for example. A recent Calculated Risk Blog post points out that “the value of household real estate has fallen $6.6 trillion from the peak—and is still falling in 2011.”

That’s a mind-boggling amount of home equity that has been wiped out in the past four years, and an astonishing number of homeowners who are stuck in homes that they can’t sell without bringing a big chunk of cash to the closing table.

Frankly, though, statistics don’t mean squat when you are the one writing out checks every month to pay a mortgage that’s much larger than what you could sell your home for. What are your options in this kind of scenario? I’ve come up with six possible ways to deal with an underwater home, and will detail them in this series. Here is the first.

Option #1: Stay and Pay

If homeownership was simply a financial decision, we’d probably see many more foreclosures and short sales than we do now. After all, why keep throwing money at a bad investment? There are myriad reasons why people continue paying their mortgages even though it may take years—or even decades—to get back to the point where the home is worth more than what’s owed. Whether it’s a sense of obligation to live up to the contract they signed when they purchased the home, a strong attachment to the place where they have lived and perhaps raised a family, worry about damage to their credit rating by not paying, or just plain resignation, many homeowners are going to just keep on writing out that check each month and hope for the best.

The benefit of this approach is that you don’t have to be concerned about others finding out about your financial difficulties or find a new place to live. But there are some important questions to ask yourself, with the main one being whether you are just postponing the inevitable. You may be keeping the wolf from the door, but he may be lurking not far away. And financially, you may pay significantly more to keep your home than if you rent, and perhaps later buy a less expensive home.

Cathy Moran is a bankruptcy attorney in California who deals with a lot of underwater mortgage situations. “I am spending a lot of energy talking people out of homes on which they are spending too much money and have no hope of having any equity in for at least a decade,” she says.

Moran suggests homeowners who are underwater compare the monthly mortgage payment, plus carrying costs like repairs, homeowner dues and taxes, to the cost of renting. “If that investment (the home) is in a black hole you might as well flush twenty-dollar bills down the toilet,” she says.

But despite that logic, Moran finds it’s not easy for her clients to let go of their homes. “We have instilled unrealistic emotional value in a home,” she says. “The home is now on the same level as the flag and motherhood. But it’s just housing.”

If you decide to stay and pay, you may be able to get financial help to catch up with payments if you run into a financial hardship. For example, the Emergency Homeowners Loan Program (EHLP) is providing interest-free loans that may be forgiven over time to homeowners who have fallen behind on their mortgages due to job loss, unforeseen medical bills, etc. Because these programs change frequently, it’s a good idea to work with a HUD-approved housing counseling agency in your area to find out which programs may be available.

Other options for homeowners with “underwater” mortgages:

  1. Underwater On Your Home: Stay and Pay
  2. Underwater On Your Home: Refinance
  3. Underwater On Your Home: Get a Loan Modification
  4. Underwater On Your Home: Short Sale
  5. Underwater On Your Home: Walk Away / Foreclosure
  6. Underwater On Your Home: Bankruptcy

Also Read: How to Negotiate a Settlement on a Second Mortgage

Infographic: The Ultimate Guide to Underwater Mortgages

Want to hear more? Listen to Gerri’s interview on what to do if your mortgage is underwater from this weekend’s radio show, The Credit Line:

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[Resource: Get your free personalized Credit Report Card]

Gerri Detweiler Credit.com's Personal Finance Expert, Gerri focuses on financial legislation, budgeting, debt recovery and consumer savings information. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis. Reach Gerri at creditexperts@credit.com.

Comments

{ 11 comments… add a comment }

Kathy S. July 11, 2011 at 12:00 PM

Our home is currently underwater, but we decided to stay for two reasons: 1) I grew up in a housing project. As a child, I always dreamed of having my own home that had a big, green backyard to play in instead of playing on concrete, and one that we could decorate the way we wanted. Four years ago, we were able to realize that dream. We may be underwater, but we are in slightly better shape than most because we opted for a 30 year fixed rate @ 5.625% when we bought our home in 2007. 2) We believe that our property value will spike up. There is a shopping mall with an anchor grocery store & luxury apartments being built nearby. The grocery store is scheduled to open next year, as are the apartment buildings. We believe this may increase the property values on the homes nearby. I can’t see us walking away from our home right now. There is too much value (mainly personal) at stake.

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George Almodovar July 17, 2011 at 2:30 PM

Kathy S., you are doing the right thing. If your house was under-water, your best option would be to modify your loan and not refinance, which would add to you lost. Many people mention, “refinance, refinance,” but they are not awared that time is money, especially on a mortgage note where the amortization is more towards the end and not the begining of the loan. In other words, you pay way more on compounding interests compared to the principal (amount owed) at the begining of the term than on the end. Thus, when you refinance, you not only would pay thousand of dollars on closing costs, especially in NY, but you will also begin on the top of the amortization schedule paying mostly thousands of dollars in interests and hardly any principal on your debt, therefore, taking longing to build your net-worth and equity on the property.

Remember what went down in value is not actually your home’s value, unless you paid 100% of the purchase price, but what went down is the note which is mostly the bank’s money or the tax payers if it is an FHA or federal guaranteed loan. Therefore, hold on and if historical data and statistics doesn’t fail which includes data of over one hundred years, “properties double in value every ten years.” Ten years from now it will be much harder to purchase a house and obtain a loan, as well as rent an apartment.

Best Wishes,

George Almodovar
CEO of Striving for Better Days, Inc. &
Author of “The NO BS in Making Millions in Real Estate.”

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Gerri Detweiler July 12, 2011 at 8:50 PM

Kathy –

Thanks for sharing your story! If you can afford to stay, and want to do so, then there’s nothing wrong with that decision. I do wonder if you can refinance to a lower rate, though. That could save you money and make it easier to pay down principal so you can get back to positive equity more quickly. Make sure you read Part II to see if that’s a possibility!

Gerri

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Jason August 4, 2011 at 10:26 PM

Our home is currently underwater. I purchased the home in 2007 at 190,000. Since that time our home value has fallen to around 135,000 (assessed) and a comparable house next to ours was recently sold for 65,000 in an auction. I thought I was being smart by getting a fixed rate 30 year mortgage but the loss of home value has destroyed any equity in my home and made it unsellable. I feel trapped by my home. I can make payments on my house comfortably and am in no danger of foreclosing, but it is extremely frustrating to pay so much beyond what the home is worth when I did nothing wrong in the initial planning process except purchase at the wrong time. I want to continue paying my mortgage but it is becoming harder and harder to justify especially when my taxes just went up another 800 a year for the property. I’m not sure what to do except put my story out and vent.

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Gerri Detweiler August 8, 2011 at 9:14 AM

Jason,

Petty sickening isn’t it? The one thing I would suggest you do is see if you can challenge your tax assessment. Your home may not be worth what the property appraiser is saying it is worth. Other than that, it sounds like you’ll be riding it out with millions of others.

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CMR August 11, 2011 at 7:48 PM

My home is also underwater, 5.625%, put 20% down, never late on a payment. Home purchase price was $212K and now values at $103, mortgage balance is $148K. Is there any hope of refinancing this mortgage? Chase will not discuss. They have literally said just walk away no other options. Isn’t that crazy?

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Gerri Detweiler August 12, 2011 at 11:35 AM

It IS crazy!

Normally I’d say check with another lender but it sounds like you may be too far underwater for HARP (new loan amount must be no more than 125% of the value). Are you thinking bout walking away? What state do you live in?

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Richie August 12, 2011 at 7:03 PM

Like the other comments, my home is underwater. I live in SF Bay Area.

I bought my house in Dec 2006. The house was valued at 660k. I put 20% down. My mom co-signed with me so I would qualify.

In April 2008, I refinanced to get my mom off the loan and get below jumbo threshold. The new loan amount is 413K at 5.625% for 5/1 ARM. I have never missed a payment, but it’s a struggle being a single home owner. Currently, my loan is 390k left. My current value of my house is about 320-330K.

What do you think is my best option? Stay and Pay? Can I qualify under HARP?

Any advice would be greatly appreciated. Thanks.

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Gerri Detweiler August 18, 2011 at 10:06 AM

Richie,

I would encourage you to talk with a lender with expertise in HARP loans. YouCanRefi.com will help you find out if you qualify. If not, you are definitely in a loan that sounds like it can be unsustainable long term, so I would encourage you to explore all your options. Talk with a bankruptcy attorney to find out what they recommend, and to find out what would happen if you walk. (Find out if your loan is recourse or non-recourse – that could make a difference in your negotiations.) Talk with a HUD-certified housing counselor to hear what they may be able to suggest. If you decide you want to stay and can, be dogged about trying to get your lender to modify your loan to a long-term fixed-rate loan.

I know it’s not easy, but with rates so low right now – and foreclosures so high – it’s a good time to try to push them to work with you.

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Chris August 17, 2011 at 7:12 PM

I live in Lee County, FL and purchased a loan for a condo in 2005 for $140k with a 5 yr ARM. Balance on primary is $99K, secondary is $26k. Zillow has the market value at $40k. Aurora won’t return my calls. Why not offer a principal reduction program for homeowners who are not experiencing a “hardship?”
Why not be more like Javier? What are the consequences? Isn’t this a black mark on any employment application?

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Gerri Detweiler August 18, 2011 at 9:59 AM

Chris,

I wouldn’t recommend relying just on Zillow for the value. Ask an experienced real estate professional to help you get a more accurate analysis of the value. If it can appraise high enough then perhaps you will be able to at least refi the first under HARP…?

If not, you may have a good basis for trying to negotiate a reduction on at least the second which is, for all intents and purposes, unsecured at this point.

As for walking away, that’s a decision only you can make. It will negatively impact your credit and that could come up on a job application. Are you job hunting or will you be shortly? Of course, you do live in a part of FL that’s been hit hard by the housing bubble. There may be some sympathy there among prospective employers!

On Talk Credit Radio tomorrow I’ll have a FL real estate attorney and real estate agent, both of whom have experience helping homeowners like you. I’d encourage you to call in to discuss your situation if you can.

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