In many cases, when you make payments on your mortgage, you start to build equity in your home. If the value of your home falls more quickly than you can pay down your mortgage, something called negative equity, also known as being underwater, develops. If this happens, the value of your house is less than what you still owe on the home loan. It became common during the recent housing crisis and is still prevalent in certain areas, such as Atlanta, which finished the fourth quarter of 2013 with a negative equity rate of 35 percent, the second highest in the country.
All isn’t lost if you owe more on your home than it’s worth. You have a few options.
Wait out the storm
One of the easiest things to do if your house is underwater is to wait for the market to reverse. If you aren’t planning on moving in the next few years and can still afford to make payments on the home, waiting is ideal. Although it might seem that it will take a while for things to pick up, the market is already turning. According to the Equity Report for the Fourth Quarter of 2013 from Core Logic, at the end of the fourth quarter in 2012, 10.5 million people had negative equity in their homes. The number had shrunk to 6.5 million by the end of 2013.
While a traditional refinance might be off the table if your home is underwater, that doesn’t mean you’re stuck paying higher interest rates or are entirely unable to refinance. The Home Affordable Refinance Program (HARP) is designed for homeowners who owe more than their homes are worth, haven’t fallen behind on payments and who want to take advantage of the still-low interest rates for refinancing.
HARP is a government program, and your mortgage must meet a number of requirements for you to be eligible. The mortgage must be guaranteed or owned by either Freddie Mac or Fannie Mae, and you need to have gotten the mortgage before May 31, 2009. You also need 12 months of good payment history to qualify, and your loan-to-value ratio should be above 80 percent. At the moment, HARP is scheduled to end on December 31, 2015.
Consider a short sale
Although it’s not ideal, a short sale might be an option if you don’t qualify for HARP and can’t afford to stay in your home until the market turns. Your lender will have to agree to accept less than you owe on the mortgage for you to do a short sale.
Typically, a short sale is better than a foreclosure, but it will still have a negative effect on your credit. If you want to buy another house right away, selling your current one as a short sale will keep you from doing so.
If your house is underwater, weigh each of your options before choosing the one that best meets your needs.
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