Homeowners who are underwater on their mortgage simply owe more on their home than it is worth on the market. This is a situation no homeowner wants to be in, but it happens all too often, especially in these uncertain economic times. If you happen to be in this boat, you’re likely feeling anxious and overwhelmed. But don’t despair: you do have options. Check out these options for Kauai homeowners who are underwater in their mortgage.
What an Underwater Mortgage Is and How It Happens
Also called an upside-down mortgage, an underwater mortgage is simply a mortgage loan for which the principal is more than the home is worth. A typical cause is a dramatic drop in property values. But whatever the cause or reason, you still have to pay the original loan balance.
Homeowners who are underwater on their mortgage usually get that way for one of or a combination of two reasons: a decrease in property value and missed mortgage payments.
If, for example, you find a home you want to buy for $200,000, your lender will order an appraisal to make sure the home is actually worth that amount. If the appraiser determines that it is, the lender will lend you, say, $160,000 because you plan to pay $40,000 down.
Then suppose a couple of years down the road, your neighbors are having trouble selling their homes. So they lower their selling prices in order to sell in the face of lower demand. And what that does is lower property values so that your home is now worth $120,000 – but you still owe more than that. In that case, you are underwater.
You can also reach that state by missing mortgage payments. In the early stages of repaying your mortgage, most of the payments go toward interest, and as time goes on, you pay less in interest and more toward the principle. If you miss payments, the interest accumulates, and it takes longer to pay down the principal. Eventually, you may reach a point where you are underwater.
Main Options for Homeowners Who Are Underwater on Their Mortgage
If you find yourself in the unfortunate situation of being among the Kauai homeowners who are underwater on their mortgage, you still have options besides foreclosure. So let’s look at some of those options . . .
Refinancing Your Home
Technically, homeowners who are underwater can’t refinance their homes in the traditional sense. Most lenders require that you have at least 20% equity before they’ll allow refinancing. But you may qualify for the HARP program, which was created in response to the housing crisis of 2008 and can provide a way for you to refinance even when you’re underwater.
To qualify for the HARP program you must have made your mortgage payments on time over the previous six months and with no more than one later payment over the past 12 months. In addition, the program applies only to mortgage loans originated prior to May 31, 2009.
Selling and Paying Off What You Owe
Another option for homeowners who are underwater is to sell their home and then pay off the what is owed on the mortgage. If you hadn’t intended to stay in the home anyway, this is a viable option.
Keep in mind, though, that because you’re underwater, you’ll be selling at a loss. So if take the traditional home-selling route, you will have to make up the difference between what is owed and what the home is worth with cash out of your own pocket.
It’s a good idea, then, that before you take this drastic step, you consult an experienced Kauai agent to determine whether this is your best option. To discover more, you can contact an agent at 808-634-4518 homeowners who are underwater in their mortgage is to stay in the home and work to build equity. This approach, though, will require discipline and patience.
In almost every case, homeowners who choose this option will have to increase their income. Many times, that means getting a second job, and it will almost certainly mean cutting expenses drastically and budgeting carefully. And then that extra income and save money will have to go toward the home.
Then, as you pay down the principal and gradually build equity, you can do a traditional refinance when you reach 20%. The point is not to give up and just keep chipping away at the mortgage.
Where to Turn for Assistance
So if you find yourself underwater, you do have options other than foreclosure. But for most homeowners, it’s difficult to determine which option is best for their particular circumstances. And that’s where an experienced Kauai agent can provide invaluable assistance. If you’re among the Kauai homeowners who are underwater in their mortgage, be sure to contact us at 808-634-4518.