Underwater mortgages are mortgages where the loan value is higher than the current value of the property. For example you get a loan for $275,000 but your home is appraised for $100,000 your mortgage is underwater by $175,000.10 percent of all homes have an underwater mortgage. This is a lingering effect from the Great Recession. Places like Las Vegas and various southern cities have bounced back. Negative equity slows down the housing market as a whole. Overall demand for homes is increasing exponentially. Retirees moving domestically, College graduates transitioning to homeowners, and the constant waves of immigrants trying to achieve the american dream. The current supply of houses is been cut down by underwater mortgages. Those with underwater mortgages tend to hold on to their homes and are less likely to sell their homes. Many of those affected are veterans and servicemen. The VA loan makes homeownership easier for all military members. This is a factor why many homeowners aren’t leaving their homes. A default can negatively affect security clearances and eligibility for future VA loans. Here is an overview on Underwater mortgages and solutions.
Places hit hard by Underwater Mortgages
Two of the major US cities that have the most underwater mortgages are Chicago and Virginia Beach. New York,Los Angeles and San Francisco all have underwater mortgages. However these respective markets have a lot of domestic and foreign buyers. House values are more likely to increase rapidly than decrease over time. In Chicago 15.5% of homeowners have an underwater mortgage. Investments from corporations help local housing value appreciation. The second amazon headquarters in Long Island City,NY will increase home value and demand for housing in that area. There is commercial growth in Chicago but it isn’t enough to stop migration to suburbs like Kenilworth. The reasons for Chicago’s slow process of resurfacing include slow growth in employment, loss of population, and a shift of home buyers’ attention from outlying suburbs toward the city and inner-ring suburbs and the south.
Rent out your home and gradually increase rent . It depends on your location. A well furnished 3 bedroom living space can bring in at least $3000 per month in cash flow if you are in Chicago. As a renter you have tax benefits from depreciation of your mortgage. Renting your property gives you more incentive to renovate your property and increase its value over time. Save money by forgoing a property management company. You pay either friends and family to work for you. This not only teaches younger people a vital skill but saves money on your investment. You maintain more control if you manage all repairs and communicate directly with your tenants. Many times it is better to hire a property manager.
You can refinance with HARP Home Affordable Refinance Program. This program was made for negative equity mortgages. If you lower your interest rate. You will have an easier time paying your monthly payment. There are tax benefits for loan refinancing.
A short sale is when you sell your house for less than you owe your bank. You will still have to pay off the deficiency balance. However it looks better on your credit score than defaulting. Paying for the deficiency out of pocket is tedious but not hard. We discussed renting as a source of income. There is a lot of potential sources for extra money. It could be freelancing, Airbnb, house hacking or using a foreclosed home into a home based business. In a previous article we discussed ways to earn extra money. If none of these work then dip into your retirement funds or savings if needed.
The worst case scenario you may have a foreclosed house on your hands. There are two types of foreclosure. Judicial and voluntary. Both look bad on your credit score and you lose the keys and the deed to your home. At least with a voluntary foreclosure you don’t have to deal with law enforcement. Chicago will get out of the underwater mortgage crisis. For the rest of Midwest there will be a lot of migration out of the Midwest. However manufacturing will be coming back to the Midwest. The largest generation in american history is currently being born. The oldest members of this generation are entering the job force. This creates an immense domestic demand for goods and services. Manufacturing won’t be the same as current facilities. It will be fully or partially automated with more production than Chicago or Detroit in the 50s. This will bring more specialized jobs centered around advanced technology.