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Shiva’s husband was among those laid off. Now she fears her house may be worth less than half what she paid.
“I want to move to a place with cheaper rent, but now I can’t sell my house for an amount that will cover what I still owe,” she wrote in response to a recent story. “I feel trapped.”
Shiva is not alone. There are 15.3 million Americans who owe more on their mortgages than their homes are worth, according to the latest report on negative equity by Zillow.com, a listing service for foreclosed properties. Nearly 31 percent of people with mortgages are underwater.
Many of them find themselves in Shiva’s position: Too little income to continue making payments, but too scared about all the money they’d lose if they sell now.
“(Y)oung homeowners continue to be disproportionately affected by negative equity,” Dr. Stan Humphries, Zillow’s chief economist, said in a press release. “Negative equity is trapping young people in their homes, preventing them from selling.”
The problem of negative equity affects many young adults in places like Portland, Oregon, which experienced skyrocketing home value increases during the mortgage boom, says Andy Tilp, president of Portland-based Trillium Valley Financial Planning. But it also is common in Midwestern cities, where the boom was less booming but the bust just as devastating.
Jeremy Vohwinkle, 32, is a financial planner in Elkhart, Indiana. He bought his first house during the housing boom, and since 2008 he has watched its value plummet. Rather than sell it at a loss, Vohwinkle opted to rent out the home, despite the fact that finding tenants in Elkhart’s depressed economy is difficult.
“A lot of people my age bought houses between 2000 and 2005 to participate in what seemed to be a rapidly rising real estate market,” Vohwinkle says. Now, “it is pretty common when you sit down and look at peoples’ situations” to find that their house is underwater.
Of course, having an underwater mortgage isn’t necessarily so bad, as long as the homeowner can afford the monthly payments and has no plans to move, Tilp points out.
“I have other clients who can afford the payments, their job situations look pretty good, they want to stay in the area, and they’re reasonably happy with the house,” says Tilp. “So I advise them to think about staying where they’re at.”
Of course, one’s mortgage does not exist in isolation. There are many other factors to consider when deciding whether to keep an underwater home, such as one’s income, student loan and credit card debts. Selling might make great sense for Shiva, but terrible sense for her neighbor.
“First and foremost is to step back from the immediate agony of the situation and think about how it fits within the larger picture of your life,” Tilp says, “What we have to do is look at each sit individually.”
And then there’s the broader economy to consider, including the direction of home prices and the economy in one’s community.
“It depends to a large extent on where they are in the country, and how long it will take the market to recover,” says Gerri Detweiler, Credit.com’s consumer credit expert.
Here are some tips for people who find their homes underwater:
Consider the Big Picture. Sure, owing more than your house is worth is a drag. And as long as you do, “You’re essentially paying rent,” Detweiler says, since you’re not building up equity. But consider all the other factors. Are you only a little underwater? What about your income and other debts? If you plan to stay put for a few years, being underwater now might not matter so much.
Refinance. Even though banks have tightened lending requirements since the housing boom, some lenders are beginning to offer refinance and mortgage modification options, Vohwinkle says. You may also be eligible for the federal Home Affordable Modification Program. “Its not easy” to fill out all the forms and manage all the paperwork, says Vohwinkle. “But if you really sit down and try, there is help out there.”
Rent it Out. Rather than selling, see if renting will allow you to keep the house, and all your invested equity. “You may not recoup every penny for the mortgage,” Vohwinkle says, “but even if you get 50 percent of the mortgage from rent, that’s a lot better than taking a huge loss.”
Short Sale or Foreclosure. A short sale might leave you with less money to repay the bank; a foreclosure might give you more time to live in the house rent-free before the court legal system catches up. Either way, you may be able to get out of paying high mortgage payments. And either way, your credit score will get decimated. “If it’s a short sale or a foreclosure, you don’t really have a good option,” Vowhickle says.
Watch for Hidden Costs. If you sell your house for less than the mortgage amount, you may owe the remainder, which banks call the “deficiency,” Detweiler says. Be sure to bring this up in negotiations with your bank. Also, any forgiven loan amount will be treated as extra income by the IRS, and may be taxed appropriately. Make sure you know what that amount will be beforehand, and find out whether you can avoid paying taxes on that amount.
[Related Article: 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt]
Image: Ester Mustamu, via Flickr
December 13, 2023
Mortgages