Learning the game plan of dealing with your underwater mortgage

Of all the changes that you might make to live on a budget, the most fundamental one is finding an economical place to live. Sadly, this is an option that is closed for the people who are underwater on their mortgage loans. Unless they have enough cash to bridge the gap between what their house will sell for and what they owe on the house, they’re pretty much at a loss. Reports suggest that more than 1 out of every 5 homeowners in the US are weighed down by an underwater mortgage and unfortunately there’s nothing much that they can do about it.

Strategic default - Is it worth making payments?

James Surowiecki, a writer in The New Yorker, claims that while business firms like American Airlines are exalted for making smart financial decisions when they walk away from expensive debts, homeowners are usually ashamed into dumping money into their underwater homes that are worth much less than the mortgage loans that back them. Surowiecki even argues that paying these underwater mortgage loans is similar to setting cash on fire. The values of many homes have dropped to such an extent that it doesn’t make any financial sense in keeping them. If more and more homeowners were to strategically default on their homes and halt making payments, lenders would soon be forced to offer more aid to the borrowers.

Dealing with financially sinking properties - 7 smart strategies

What should you do if your home is slipping deep down underwater? Well, it will depend on how deep it is. Considering different possible situations, check out some of the smart strategies to deal with financially sinking properties.

1. Pay as well as stay: Most people are closely attached to their homes and hence their first impulse is to stay put and keep making mortgage payments, even when it doesn’t make any sense in the long run. However, is it realistic for you to take such a step? Not just the next few months but will you be able to stay and continue with the payments for several years? Even after paying for several years, you may still remain underwater on your loan at that point of time. Another consideration is the maintenance fees. For example, if you think that the heating system in your home needs some repair, these costs will also add up. Of course, if the value of your property has scaled down, you can also get it re-assessed and pay cheaper property taxes. 
2. Rent it out: If you can rent the house and cover the ownership expenses, you can move into an economical place and live there. In fact, even if the rent is not enough to cover the costs, you can still come out and look for a cheaper place to stay. Less drastic than this step, you can plan to rent out a single room. If you have a bigger house, you could potentially rent out 2 or 3  rooms.Though this might not be what you had in mind, but perhaps it is slightly better than losing your home to foreclosure.
3. Refinance your loan: For homeowners with negative equity, a traditional refinance might not be the best option. Those with loans backed by Fannie Mae and Freddie Mac and who haven’t been more than 30 days late on their payments in the last 12 months, may be eligible for a refinance under the HARP or the Home Affordable Refinance Program . If your loan hasn’t been sold off to Fannie or Freddie, you can work directly with your lender for refinancing your mortgage loan. Although your credit score won’t be hurt if you refinance, yet you could still run the risk of losing your home if your financial situation changes and you fail to make payments.
4. Modify your loan: In a loan modification, the lender lowers the monthly payments and the interest rates, either permanently or temporarily. If your mortgage payment exceeds 31% of your monthly pre-tax income and you’re going through some extreme financial hardship, you may be eligible for HAMP or Home Affordable Modification Program. The only downside is that the entire process can be extremely time-consuming. Since very few loan modifications actually chop off the principal, you still tend to be in negative equity as you’ve just ended up lowering your monthly payments. Until you’re at positive equity, you will remain stuck with that house.
5. Short sale: This is when you get the permission of the bank to sell off the house for less than the outstanding balance due on the mortgage. Sometimes the bank will settle for the sales price and eliminate the debt. Otherwise, they will expect you to pay a portion or all of the difference and the due balance is converted into an unsecured loan. If you sell off your underwater home in this manner, you owe a lot less money. Check with a lawyer and know your prospects of short selling your home. Remember that if the bank forgives a portion of your loan and if the amount is more than $600, this will be considered as taxable income by the IRS.
6. Walk away or surrender to foreclosure: Walking away from your mortgage is technically the same as surrendering your home to a forced foreclosure. This is one of the most noteworthy items on your credit report, in the same category with repossessions and bankruptcies. However, you shouldn’t only focus on the ill impact of foreclosure on your credit score. If you decide to walk away from your mortgage, the biggest challenge is to convince the bank to take back your house and if the bank forecloses, you will soon be on the hook for insurance issues. Therefore, it is anytime better to stay in your house for as long as possible and ensure that it’s properly maintained before it leads to a foreclosure.
7. Bankruptcy: Well, you can’t erase mortgage debt by filing for bankruptcy but what you do in bankruptcy is to give yourself a respite from all your other debts. When you downsize all your other debts, you could easily free up money to repay your mortgage. A chapter 13 bankruptcy could also enable you to catch up with your payments for 3-5 years without interest. But it doesn’t allow you to stop making payments towards your mortgage altogether. There are some areas where you can even wipe off a second mortgage that has become unsecured due to the drop in the property value.

Conclusion

 According to reports from Realty Trac, increasingly large numbers of mortgage borrowers are presently keeping their heads above water. The company also reported that 9.3 million properties or 19% of all homes with home loans were “deeply underwater” in December (2013). This figure is down considerably from 26% of all homes with home loans or 10.9 million properties last January ( 2012). A recent recovery in the housing market has turned around the fortunes of many homeowners. Nevertheless, you may get help of any of the above mentioned options if you’re dealing with an underwater mortgage.