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Owing More Money Than The House Is Worth

Owing More Money Than The House Is Worth

How is it possible to end up in a situation where you are Owing More Money Than The House Is Worth?

Worth House The Money Owing

Upside-Down Mortgage Mess

Roughly 12 million homeowners are underwater. That is, they have bought homes with mortgages they cannot afford to pay and the value of their homes has subsequently dropped below what they paid for it. They owe more in mortgage debt than their houses can fetch in this tumbling real estate market. And the number of people facing a similar financial crisis is on the rise. Tonight, ABC News correspondent Vicki Mabrey interviews one such family, whose dream home became a nightmare. But there are things that can be done to stop the bleeding.
Ref. ABC Nightline

Owing More Money Than The House Is Worth History & Civil Business Politics

Most homeowners who end up owing more than the resale value of their home ended up their because of plummeting home values or bad financing. If they have a high interest rate they can end up paying hundreds of thousands more than the actual purchase price of the home. If the housing market crashes the value of the the home can be less than what is actually owed.

Worth House The Money Owing

What has happened to many homeowners is that they got some really creative financing vehicles that allowed them to get into their home with little or no money. The typical loan is called a ARM (ajustable rate mortgage). The real key to getting a ARM loan is usually the low initial interest rate. This can be for only one year or some ARM's may actually hold a low rate for a few years (usually 3-4) and then start to increase. The increase is usually capped so that you cannot get much more than a 2% increase per year in interest. What is not really written about these loans is that you are pretty much expected to refinance your home before the interest rate increases become too large. By that point, it is expected that the equity you have in your home will allow you to get a fixed loan with a reasonable interest rate.

However, say you are in year 5 of your loan (basic ARM interst rates are getting pretty high and result in a large house payment). Your loan was for $100k and basically, you have been paying all interest and almost no principal. You really cannot afford this loan anymore (have been paying for 5 years now) and want to refinance. Unfortunately, the market has changed and the market price of your house is now $80k. You do not have $20k in principal, so you cannot pay off the loan you already have with the new loan. Your stuck. You cannot sell the house because you would end up owing the first mortgage company.

The only solutions are...

*default on your loan
*get another loan to pay for the current loan and refinance (no win...still in major debt and not likely to happen because you have no equity)
*get some other person to pay more than your house is worth and sell it immediately (not likely either)
*try to make a deal with your mortgage company (no a high chance of success there)

The bottom line is that you really need to have enough money to put down about 15 - 20% minimum on your home to weather price fluxuations. Be very careful about getting into a ARM mortgage. I am not saying they are bad...because if you get one with a very low interest rate for the first few years and make substantial non penalized payments towards your principal, then you will be less likely to be in that situation. However, most people dont do this...

Worth House The Money Owing

I think you are right Vincenzo many just get in to far and are conned into to it by shading mortgage brokers. They are just looking to make their quick dollar and care little for the future.

I also will state this as it has passed my mind several times over on the low to no down on a house. If you are renting and can get a zero down mortgage then it might be a win win in some ways. If you just keep renting you never get anywhere but if you are paying the mortgage you might end up ahead, as long as you realize the risk of a downshift in the real estate pricing. If the house is lost in the big scheme you are still no worse off then if you had just rented the entire time assuming the rent and mortgage were about the same. Remember when gambling you usually lose.

Owing More Money Than The House Is Worth

I am glad that I am not in this boat yet. My house value is still more than what I owe. I know that many can get into this situation and the current economy is not helping much. I am wondering when we are going to see a good turn for the better. I am still thinking the home crisis has still a few months to go before we may see light at the end of this tunnel.