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What is an Underwater Mortgage
If you browse the news whatsoever, no doubt you've seen the word "underwater mortgage," but are you aware what that means? When a mortgage is underwater, this means the homeowner owes more about the mortgage compared to house is actually worth.
That's not supposed to happen. In fact, from roughly 1990 to 2006, no one seriously believed that underwater mortgages were ever going to be a large problem. All of us thought that housing prices would certainly keep rising and that we could rely on our building equity to provide all of us another cool things we wanted. Like fancy cars, a brand new deck, or a guaranteed retirement.
Thanks for visiting reality! What happened instead is the fact that mortgage brokers got pushed into writing more mortgages to more people through the authorities within the 1990s, the banking industry got greedy. Mortgage brokers wrote increasingly questionable mortgages for those who obviously wouldn't be in a position to afford their debts.
They created ARMs, a home loan product that offers a sweet low rate in advance interest rate, but then resets to reflect inflation after 1-7 years, with respect to the terms you have, and keeps resetting each year next.
And you know what happened? Exactly! Those bad mortgages started going bad in droves starting in 2007. Simultaneously, the mortgage brokers had sold those mortgages in bundles with false labeling, therefore the companies that committed to those mortgages suddenly started losing money hand over fist.
And, voila! We had the recession and near-financial collapse of 2009.
You know what else happened? Suddenly there is a glut of houses available on the market from all the foreclosures that happened once the people who got those bad loans couldn't pay them. What happens when supply goes in place? Demand falls way down-and so do property values.
Add 10% (or 17%, if you know how the federal government isn't showing you accurate unemployment numbers) unemployment into the mix, and what we should dress in our hands now's a mess where a quarter of US homeowners have underwater mortgages-and one inch ten of these owe 25% a lot more than their properties are worth!
Clearly this can be a tough situation for homeowners who require to decide whether it makes more sense to help keep paying on their own underwater mortgage in order to strategically default, just as any company does when it is confronted with an underwater investment.
It's a hard situation for neighborhoods when houses are getting boarded up and trashed because of foreclosures-which just drags property values down more.
And it's hard for city governments as they're losing all of that tax revenue from property taxes.
But when you're dealing with an underwater mortgage, the first people you have to consider are yourself and your family. If you choose to leave and strategically default in your mortgage, you could end up remaining in your home rent-free for possibly up to 24 months.
This way everyone wins a little. You retain maintaining the home so the mortgage company doesn't have to. You may want to keep make payment on taxes in that time, but that helps keep city services going. And your neighbors won't need to take a hit on their own property values while you're waiting your default period. You may also be able to negotiate a brief sale together with your lender therefore the house is never empty!
And while you're remaining in your home payment-free, it can save you up for your life after your foreclosure or short sale. Quite simply, you will not be throwing a nice income after bad.
In a nutshell, then, an underwater mortgage presents homeowners with tough decisions. That's not to totally win here. But you could possibly get out with most of your finances intact and become a small assistance to your neighbors and community while you're doing it. So, really, if you're in an underwater mortgage this isn't a life-or-death situation-unless you let it be one.
