MAR 13, 2023
When you buy a home with a mortgage, you are essentially borrowing money from a lender to pay for the property. The mortgage is typically paid off over a period of 15 to 30 years, with monthly payments that include both principal (the amount you borrowed) and interest (the cost of borrowing the money). But what happens if the value of your home drops below the amount you owe on your mortgage? This is what is known as being "underwater" on your mortgage.
For example, let's say you bought a home for $300,000 and took out a $250,000 mortgage to pay for it. If the value of your home drops to $200,000, you would be underwater on your mortgage by $50,000. This is a problem because if you were to sell your home, you would not be able to pay off your mortgage with the proceeds of the sale.
One common reason is that the housing market declines, causing the value of your home to drop. This can happen due to economic factors, changes in local demographics, or other factors that are outside of your control. Another reason you might become underwater on your mortgage is if you took out a loan that was too large for your income or if you refinanced your home and took out more money than you should have.
Being underwater on your mortgage can be a serious problem, especially if you need to sell your home. If you owe more on your mortgage than your home is worth, you will have to come up with the difference in order to pay off your mortgage. This can be a challenge, especially if you do not have a lot of savings or if you are facing other financial challenges.
If you find yourself underwater on your mortgage, there are a few options available to you. One option is to continue making your monthly mortgage payments and wait for the value of your home to increase. This can be a slow process, but if you are able to ride out the market fluctuations, you may eventually regain equity in your home.
Another option is to try to negotiate a loan modification with your lender. A loan modification can involve changing the terms of your mortgage, such as lowering your interest rate or extending the length of your mortgage. This can make your monthly payments more manageable and may help you avoid foreclosure.
Finally, if you are unable to make your mortgage payments and are facing foreclosure, you may want to consider a short sale. A short sale involves selling your home for less than you owe on your mortgage. While this will not allow you to make a profit on your home, it will allow you to avoid foreclosure and may be a better option than having your home repossessed.
This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.