More Homeowners Underwater With Mortgages

This will not come as a surprise to you, but the number of homeowners now underwater or upside down with their mortgages has reached almost a full quarter of all homes with a mortgage, a total of 11.1 million households.  With 23.1% of all homeowners owing more on a mortgage than their homes are worth, I wonder how many people will begin to think that walking away from their homes is a better idea than staying put.

It won’t surprise you that areas with high foreclosure rates also have the highest rate of underwater homeowners.  Nevada is the worse in the country with more than 60% of all homeowners falling in this category.  Not far behind were Arizona, Florida, Michigan and California which had up to 50% of all mortgage holders underwater.  The horror of this is that more is yet to come since some 2.4 million homes are nearing the point where they will also be underwater.  In a robust, okay, bubble market, only 5% of homes are usually underwater.

How did this all happen?  Beyond homeowners using their homes and equity as piggy banks, the collapse of the real estate market was the biggest culprit behind this phenomena.  High levels of unemployment which led to high numbers foreclosures led to the subsequent fall in property values.  Homes then lost value at a rate that outpaced the amount that homeowners were housing bubble is about to poprepaying their loans, especially if they had 30 year mortgages.  This all combined to result in homeowners owing more than the home is currently worth.

So what can a homeowner do?  Well, if you are the owner of a home that is now underwater, you can not refinance.  Banks can’t lend you more than the value of the home.  If a homeowner attempts to sell the home, the chance is very high that they will lose money in the transaction since a perspective buyer will not pay more than the current value of the home . Homeowners can try to get their banks to agree to a short-sale, but many banks won’t agree, and even if they do, homeowners may have to pay income tax on the value of the forgiven portion of the loan.

Home prices hit their lowest point in December of 2010 and has begun to stabilize, however, prices are expected to continue to fall is some areas due to still high unemployment, and impending foreclosures.  What’s a homeowner to do?  If you’re comfortable in your home, sit and wait it out.  It won’t matter how much your home is worth if you plan on staying there for  a very long time.  Also consider adding as many micro payments as possible to your mortgage to accelerate your payment schedule, thereby saving you thousands in interest.   If you have a spare bedroom consider taking on a paying roommate to contribute to the mortgage.  Once your mortgage and home value hit a break-even point, call your bank and try to qualify for  a refinance.

Use the mortgage payment widget to the right to see how much faster you can get out from your mortgage debt.  And if you don’t already have a mortgage, remember my theory that 30 year mortgages are for suckers.

 

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15 thoughts on “More Homeowners Underwater With Mortgages

  • This is such a scary statistic. I have my own thoughts on why it is so high. Simply put, people buy more than they can afford and people buy a home expecting it to be a short term investment (it isn’t). Tough times can happen to us all, but the more we gamble with out finances the bigger the risk we take.

    • People always wanted the “upgrade”. This is why there are so many marble countertops and stainless steel appliances in homes now. They were once for luxury homes. We bought more than we could truly afford thinking that property would always appreciate. Now look? Almost 25% (!) of people have homes that are worth less than they paid for it.

  • One of the people I know actually walk away from their mortgages because the loan is more than the value of their home. I believe they were paying around $4,000 per month on a house that is already $100,000 underwater so to them, it did not make sense to continue paying especially if they are still struggling just to make the mortgage payments.

    • Did they try a short sale? They don’t want to be on the hook for whatever the mortgage company doesn’t re-coup. I’ve heard of some suing to get the additional money.

      • Yes you need to be careful if/when you walk away.

        If you have any mortgage insurance (PMI), then when you walk away the mortgage company gets paid.
        BUT some mortgage companies are also trying to sue the (former) homeowner for not paying.

        Mortgage companies are paid (PMI) then they try to collect once again from the (former) homeowner.
        And they are taking advantage as not many people are aware of this.

        People beware of this.!

  • Remember, if you’re not planning on selling your home (or getting a HELOC), then it doesn’t matter what it’s value is … it’s simply a place where you live. It’s “home.”

    If you are planning on selling your home, and you’re underwater, consider renting it out and becoming a landlord if the rent that you can collect is at least equal to the monthly mortgage. Kudos if you can collect rent that equals mortgage + property tax + insurance. The smaller your home, the more likely you are to be able to get a good rental income from it. If you live in a McMansion, you’ll have a harder time achieving this.

  • Remember, if you’re not planning on selling your home (or getting a HELOC), then it doesn’t matter what it’s value is … it’s simply a place where you live. It’s “home.”

    If you are planning on selling your home, and you’re underwater, consider renting it out and becoming a landlord if the rent that you can collect is at least equal to the monthly mortgage. Kudos if you can collect rent that equals mortgage + property tax + insurance. The smaller your home, the more likely you are to be able to get a good rental income from it. If you live in a McMansion, you’ll have a harder time achieving this.

  • I don’t know anyone who walked away from their home. Most of my friends own a home since early 2000s and their price is still OK.
    If I have a spare room, I would definitely consider renting it out. We did that at our old house for a while and if you can find a workaholic, it works really great.

    • I feel like walking away is beyond the last resort. No one assured anyone that prices would continue to appreciate and who knows? Prices might surge upward past where they were before.

  • Perhaps now would be a good time to invest in an under-valued rental property, or to even live in.
    With housing prices in the US at their lowest in decades, and if you had a decent amount of money for a Downpayment, you could make a killing if you hold a property for 10 years or so.

    What do you think?
    (I’m CDN)

  • Perhaps now would be a good time to invest in an under-valued rental property, or to even live in.
    With housing prices in the US at their lowest in decades, and if you had a decent amount of money for a Downpayment, you could make a killing if you hold a property for 10 years or so.

    What do you think?
    (I’m CDN)

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