Many people purchase homes with the intent to build equity, though life happens and homeowners end up underwater, whether it is upside down or with negative equity. But what do these terms mean? The total balance owed on a mortgage is more than the house is currently worth.
With the change in the market, housing prices fall and rise. If a large percentage of the home's purchase price is borrowed, a drop in its value, even the smallest, can lead to negative equity. If you are spending more on a property than it is worth, your loan balance can exceed the home's overall value. You can be underwater if your home's value drops due to damage or neglected maintenance.
Selling a home with an underwater mortgage is never a good idea. It is best to wait until you bring your equity into positive territory. By continuing to make a regular mortgage payment, making extra payments, refinancing to get a lower interest rate, or waiting for the housing market to improve will all help with that so-called positive territory.
If relocation is in your immediate future, and you can't afford mortgage payments, you don't qualify for a refinance, or the house needs major repairs you can't afford, getting the property off of your hands may be in your best interest. There are a few ways to do that.
One such option on the table is a short sale. To sum up, this is when you sell the house for less than it is worth. A lender may not take the bait and agree, and a short sale could damage your credit, though not as much as a foreclosure. Depending on your state, the lender may or may not seek to forgive the difference between the loan balance and the sale price.
Another option is to sell your house. Afterward, pay the lender the difference between the sale price and the mortgage balance. This won't damage your credit the way a short sale can. The downside? You may have to drain your savings account or take out a personal loan to cover the difference.
Sometimes, it can seem like foreclosure is your only option. A foreclosure can hurt your credit and can take several years to recover. It may also be difficult acquiring another mortgage for some time. Instead of foreclosure, a lender may agree to a deed. In this instance, you must voluntarily relinquish the deed to your home to avoid a foreclosure process. Unfortunately, a deed instead of foreclosure can damage your credit, but it is possible to negotiate favorable terms with the lender.
If you are underwater on your mortgage, it may not be best to sell your home if you can avoid it. Discuss options with a personal lender and a local real estate agent if you relocate.