If you follow the newspapers you will probably have heard the term “underwater mortgage“. This has nothing to do with owning property beneath the waves but instead refers to a situation where the amount you owe on a property is more than the value of the property itself. Since the economic meltdown a few years ago there have been a lot of people who have found themselves in this unenviable situation.
What Leads to an Underwater Mortgage?
In recent years it has mostly been the state of the economy that is causing so many people to end up owing more money on their property than it is actually worth. In the past it seemed that the value of property was going to keep on increasing, but there are now many properties that are worth far less than they were a few years ago. People originally got the mortgage when the price of properties were high, but unfortunately the price you pay back on your mortgage doesn’t drop just because the bottom has fallen out of the property market.
The state of the economy isn’t the only reason why people can end up with an underwater mortgage. Some people will use their property as collateral to re-mortgage their home and they end up in a situation where the money they owe is more than the property is worth. In the past the banks were quite willing to let people get into this situation because they took other factors into account; such as the fact that the individual had a good job that seemed secure.
How to Deal with an Underwater Mortgage?
It is tough for people to realize that that they are paying more on a mortgage then their property is worth. This is particularly tough when they have seen the value of their home drop like a stone; a lot of folk will invest everything into a property in the expectation that the value of it will rise in the future. In the past the common wisdom was that buying a house was a wise investment because the value was always going to increase over the years. As we have seen though this has not turned out to be the case.
A lot of people are stuck in the situation of choosing between continuing paying a mortgage that is too high or defaulting on it. The fact that so many people are choosing to default is causing a huge impact on housing prices in certain location. You might decide to sit things out in the hope that property value will increase in the future, but if a few of your neighbors end up defaulting on their mortgage it could lead to boarded up property that will further lower the value of your home.
An underwater mortgage is something that more people have to deal with these days. They will often end up in this situation because of events outside their control. Sometimes the value of our property will fall below the amount we have borrowed.