Being underwater on your mortgage means that you owe more on your home than your home is currently worth. This can happen when property values temporarily decrease or when homeowners miss mortgage payments with compounding interest.
And an underwater mortgage can be scary for homeowners. Your house may be your most valuable asset, and the idea that it could be a liability can be deeply unsettling.
But being underwater on your mortgage might not be as bad as you think. In this article, we’re going to explain what to do if your mortgage goes underwater.
How Common Are Underwater Mortgages?
During the extreme conditions of the Housing Market Collapse, over 35% of California homeowners were underwater on their mortgages. At the end of 2020, only around 1% of CA homeowners were underwater. The percentage is expected to increase as the housing market cools following years of exceptional growth.
What to Do if Your Mortgage Goes Underwater
It’s good to know that you have options if you find yourself with an underwater mortgage. Here are five options to consider.
Option 1: Do Nothing
The most popular option for those with an underwater mortgage is to simply do nothing. Continue making your mortgage payments as usual, and go about your life. In most cases, this is the right move.
Home values might dip temporarily as part of the normal economic cycle of real estate. But those values will always come back up. So as long as you can afford to make your mortgage payments, you can ride out the downturn and profit when values bounce back.
Option 2: Apply for Assistance
If you’re struggling to make your mortgage payments, you might want to apply for assistance. Contact your lender to ask what assistance programs are available for your loan type. The Freddie Mac Enhanced Relief Refinance Program, for example, can change your interest structure to provide some relief while you wait for the market to recover.
Option 3: Sell the House and Pay the Difference
What if you need to relocate (perhaps for a job opportunity in another market)? You can sell the house at a loss. For example, if you owe $825,000 on your mortgage, but the highest offer you can get is $800,000, you can sell and pay that $25,000 out of pocket. Keep in mind, this $25,000 would be in addition to your closing costs.
We’re not saying this is a good option. But it is, technically, an option. Let’s see if we can find a better option for those who need to move.
Option 4: Request a Short Sale
If you’re in a financial crisis, you can ask your lender for a short sale. A short sale is when the lender agrees to let you sell the house for less than you owe on the mortgage. All of the proceeds from the sale will go to the lender. But the good news is that you can either work out a payment plan for the remaining balance, or you might even get the lender to forgive that balance completely.
Lenders are often willing to forgive the remaining balance because that’s a better financial deal for them than foreclosing on the property. A foreclosure can be a time-consuming and expensive process for the lender, particularly since they would need to find a new buyer to get the property off their books.
Option 5: Convert the Property into a Rental
Depending on your local rental market, and your financial situation, it might make more sense to rent out the property than to sell it.
With high rental rates, it’s possible that your monthly rental income could cover your mortgage payment. This would allow you to retain ownership without any financial burden. And even if the rent doesn’t quite cover the mortgage payment, absorbing a small loss each month might be a better option than selling (assuming you’re financially able to do so).
How Sequoia Real Estate Can Help
Being underwater on your mortgage is not an ideal situation. But it can be manageable when you have trusted real estate professionals in your corner.
The experts here at Sequoia Real Estate are at your service. We can provide free ongoing market updates to help you gauge the market and make sound decisions. Our listing specialists can also help you sell for top dollar or facilitate short sales if you decide that selling is the best path forward.
You’re always welcome to contact us with all your real estate market questions. We’re happy to provide valuable insights through our friendly consultations, with no cost or obligation!