No Need to Panic if You Are Underwater
For decades, houses were thought of as appreciating assets – you buy one, sit back, and watch your equity grow. Most financial experts still believe this is the case long-term, but homeowners today are well aware that, short-term, home values can plunge dramatically. In fact, it is hard to open a newspaper or turn on the news without reading or hearing about how millions of Americans are “underwater” (owe more on their mortgage than what their house is worth). If you are one of those millions, you are probably feeling at least a little bit concerned. No question, it is best to be “above water”, but if you are underwater, there is no need to jump ship.

Often the panic of being underwater comes from the idea that it brings you one step closer to foreclosure. This is not true. A lender cannot initiate foreclosure proceedings against you simply because you owe more on your mortgage than the value of your house. Of course, if you cannot afford your mortgage, being underwater does not help the situation, but if you can afford your mortgage and do not plan to sell your house in the immediate future, being underwater means very little. The value of your house is just an arbitrary number that is determined by the real estate market. It does not affect your house’s ability to provide shelter for your family.

Nevertheless, many people who are underwater but can afford their mortgage are walking away from their home. Why? Some don’t see the point of holding on to a home with a $400,000 mortgage when similar homes down the street are selling for $200,000. They hope they can ditch their old home and get the new one at half the price. Before you try to do this, keep in mind that if you let your home go into foreclosure, it will be virtually impossible to get a new mortgage for several years. Some people try to get a mortgage for a new home before the old one goes into foreclosure, falsely claiming they will rent out their old home. This is mortgage fraud, and it is not something that you should do under any circumstance. The best thing to do is just hold on to your existing home and be patient. (If you are not too far underwater, you may even be able to get relief under the recently introduced federal Making Home Affordable program, which allows borrowers who owe up to 105% of their home’s value to refinance. See for more information.) Remember, even though the value of your house has taken a dip, it will most likely go up again in the future.

What if you are one of those unlucky people who are both underwater and unable to afford your mortgage? You do not have the luxury of waiting. First, look at your budget and see what changes you can make to improve your cash flow. Then, call your lender to discuss your options. If you want to stay in the home, your lender may be willing to modify your loan. If you are open to selling, the lender may accept a short-sale (where the home is sold for less than the balance on the mortgage). Even if your lender ultimately does nothing, at least you will know you gave it your best shot.

The days of a house being cash cow that enables you to remodel your kitchen or take a trip to Europe (courtesy of a home equity loan or cash-out refinance) may be over, at least temporarily, but that does not mean that you need to panic and walk away from your home. Remember, your mortgage is money that you borrowed from someone – make every effort to pay it back.