When You Owe More on Your House than It's Worth

I'm not going to say "I told you so", but I did tell you. ;-)

Yes, I warned everyone about the danger years and the problems with interest-only and no-money-down loans. Now we're starting to see the impact of them as interest rates rise and housing prices stabilize (or fall in some areas).

This piece from Money Central highlights the problem -- and how it's leaving people owing more than their house is worth. The details:

Rising interest rates would put a strain on homeowners with adjustable-rate mortgages in any economy. But the situation is growing critical for millions of borrowers who are "upside-down," owing more on their homes than they're worth.

Many of these homeowners may soon face a "can't pay, can't sell, can't refi" situation that could lead them to lose their homes.

Nearly one in 10 households with a mortgage had zero or negative equity in their homes as of September 2005, according to First American Real Estate Solutions, an arm of title-insurance company First American Corp. The study of 26 million homes in 36 states and the District of Columbia found that one in 20 home borrowers was upside-down by 10% or more.

The situation is even grimmer for recent borrowers. Of those who bought or refinanced homes in 2005, 29% had zero or negative equity, and 15.2% were underwater by 10% or more.

Interest rates on about a quarter of all mortgage loans outstanding, or $2 trillion, are scheduled to reset this year and next, according to Economy.com. Homeowners who opted for extremely low teaser rates in recent years could see their payments eventually double, said Christopher Cagan, First American's director of research and analytics.

Defaults and foreclosures are already on the rise, thanks in part to higher interest rates, cooling real-estate markets and overextended borrowers. Nationally, 117,259 properties entered some stage of foreclosure in February, according to foreclosure-monitoring firm RealtyTrac, a figure that's up 68% from February 2005.

This is exactly why people need to follow a solid, reasonable formula when buying a house. Unfortunately, many people don't do this. Instead, they borrow the maximum they can, stretching every part of their personal finances to the near breaking point, to buy their "dream house." Then, they compound this by borrowing in other areas like fiends -- for new cars, new furniture, vacations, and the like. So when something "unexpected" happens (interest rates rise, an emergency comes up, an unplanned expense occurs, a drop in income hits them, the washer, dryer, stove, etc. breaks, etc.), they have no cushion left and there is a financial emergency. I've seen this happen time and time again. Unfortunately, it seems more like the rule nowadays than the exception.

This article offers some tips for people looking to try and weather the current financial storm:

• Avoid risky loans.
• Consider locking in.
• Protect your equity.
• Control your debt and protect your credit.

This is decent advice, but for many it's too late. I hope it's not too late for you. If it's not, please get your financial house in order and on firm ground before anything like the above situations threatens you or your home.

Comments

[Andrew - Money Supply & Debt Blog]

To top it off, if the bank forgives your loan you have to pay taxes on the difference.

[Teresa Woollens]

I am trying to sell my home that has little equity built up in it because we had an emergency and we pulled equity from the home. Now my husband is being transferred to another state and we can not sell this house. We owe 186 on it and we are asking 202.999 on it and can not get anyone to even look at here in Orlando florida. Walking away with nothing. Unfortantly my neighbor sold her house and closed this Friday for 30 thousand less than market value. She also brought 20 thousand to the closing table that I do not have. With such a horrible market do you have any suggestions. Please email me thanks

[Niels]

I just want to comment here:

'Unfortantly my neighbor sold her house and closed this Friday for 30 thousand less than market value.'

Well, unfortuantely people hold on to 'MARKET VALUE' as if it has inertia or anchoring value... but to correct you, 'market value' is the price you will get from the open market. You can never get less or more than 'market value'. The last sale price is just that, just the last sale price, and it really has no basis being used as a guess for what a home is worth. Same as 'comps' what a joke. The real value for ANY ASSET is what someone else will pay for it. Simple enough for ya? So, if you owe more than its worth, you may as well walk away and take your lumps.

I see great potential in rental homes and trailer parks, I bet they are coming back into fashion soon...

Oh well.

Realtors are your number 1 enemy when it comes to buying or selling a home. Realtors don't set or help you determine 'market value' they try to convince buyers that they are paying less than 'market value' and sellers that they are getting more than 'market value'. In reality, they are trying to maximize commission either way.

People are getting screwed here, by banks that relaxed lending rules, hoping a rising market would minimize their risks, and by speculators and 'flippers' and those folks selling real estate 'get rich quick' programs not worth the paper they are printed on.

Ok, so lets say you somehow MADE money in real estate... I hope you feel good now, because it won't last. Why not? Because this melt down is a result of unreported and unsubstantiated rising asset values (known as INFLATION), and now the government (aka FEDERAL RESERVE) is effectively releasing liquidity on the market... thats about the same as 'printing money' which leads to, yes dear reader, MORE INFLATION... how do you think Argentina got hit with HYPER INFLATION? GREED, followed by governmental incompetence, followed by desperate decisions made by desperate folks.

We're TOAST folks, accept it. If you flipped, bought or refi'd a house in the last 5 years for substantially more than you paid for the house, get ready to be STUCK with it for a LONG TIME. Chin up, at least that way the bank will home some place to aim...

N

[Rosanna]

Can you refi when your house is worth less then what you bought it for?

[G]

N you are an idiot. Real Estate Agents are your best freind when you find a faithful one. Not using an agent is how you get screwed this is why you sign buyer broker or listing agreements so they can work with you, to avoid getting a fast one pulled on you, cause I can promise you this investors and sellers don't give a crap about you they are just trying to get paid. Now if you get some agent who has no idea what they're doing yes bad thing. The whole market value thing your wrong again the market value is what the majority of local (with in 5 miles) homes of same kind split foyer to split foyer hard wood floors to hard wood floors and sq ft is taken into account also the land how much lnad is it unrestricted does it have covenants so on and so on. This all makes a big difference. So let me ask you this N would sell me your home for 25 dollars doubt it but that makes every home worth 25 dollars right, no wrong it makes that seller an idiot or extremley desperate and Real Estate agents are aware of this most of the time. Heck I can tell you why most of the homes are cheaper then they should be in my local area. As for the person asking about there home in Flordia lady you don't have to wait it out. Try this go away for a couple days then come home find every little detail that you don't like and fix as much as you can ( little details matter to buyers) also make sure it feels like a home not country but home modern is best if you have different taste take down the things you really like cause plan is better. Last but not least the internet is your friend make sure it is all over the internet and photos are as good as they can be interior and exterior. Have lots of photos. Print advertisement is also a big deal some agents will say its not ans they are wrong you need to have brouchures, magazine print, newspaper print, and maybe even drop off some brouchures at a rental complex alot of times a mortgage company will do up the brouchure advertisement if you let them put their name on it and a payment guestment this could bring them business and you could convince someone to check in to buying your home cause they are tired of renting. Well hope you sell good luck. N you're an idiot, its people like you that give advice when you have no idea what you're talking about. So try not to screw any one else over.

I owe more money on my home than what its worth, what can I do, I dont want to forclose. Should I sell?

I owe more money on my home than what its worth, what can I do, I dont want to forclose. Should I sell?

[FMF]

As long as you make your current mortgage payments, there's no threat of foreclosure. Now if you must refinance in order to afford the home, I'd guess that you will need to come up with some extra cash.

[TEB]

I came to this site looking for advice about "When You Owe More on Your House than It's Worth", but all I read was a long rant from the author and a little advice that will mitigate your risk when buying a home. Does the author have any REAL advice for what do to when you actually owe more on your house than it is worth? Anything?

[FMF]

TEB --

Lots of factors to consider. Want to give us the highlights of your situation?

[UNHAPPY]

Now that I am at the point of losing my home, do I just let ut happen or is their something I can do to change things?

I have the same quetions that TEB had (see below):

I came to this site looking for advice about "When You Owe More on Your House than It's Worth", but all I read was a long rant from the author and a little advice that will mitigate your risk when buying a home. Does the author have any REAL advice for what do to when you actually owe more on your house than it is worth? Anything?

Posted by: TEB | October 20, 2007 at 11:23 AM

[FMF]

Unhappy --

I suggest you read the posts in my real estate category -- you should find something in there that could help. Here's the link to them all:

http://www.freemoneyfinance.com/real_estate/index.html

[The Man]

Worthless article. Promises information on "when you owe more on your house than it's worth" and gives NONE.

Again, worthless article. Freemoneyfinance.com is off my favorites list. Bye.

[Mary]

My daughter bought her home for $301,662 in January of 2006. She has a first mortgage of $236,880 at 6.125 and a second mortgage of $59,000 at 10.75 with a balloon coming due in 1/2009. Her taxable land value + IMP has gone down to $241,991. This means that in 1/2009 she will have to refinance. She doesn't have monies for a downpayment. How much will the bank go? Is she better off just letting it go back, as her payments now are around $2,000 per month.

[HMMM]

Okay so we bought our house with 20% down and a 30 year fixed that we can afford.

Unfortunately we bought in 2004 in Vegas when the investors, subprime, etc drove prices up 54% and drove home availability down to just a 100 homes or so and home builders created waiting lists jacking up the prices 10K per day (only to drop the same home price 100K the next year for new buyers).

So now LV has dropped so much that our 20% down has dissapeared and banks and investors are selling homes for so little that it is depressing prices more. As a result we owe more than we could sell the house for. Makes it depressing to keep paying the mortgage.

what do you do when you owe more than the house is worth but can pay the mortage? Homeowners in trouble are able to get their mortgage adjusted so they can avoid foreclosure and get their mortgage repriced. Right nice punishment for those of of that can pay our mortgage but need to move.

No wonder people who can afford their mortgages are starting to walk away.

[FMF]

HMMM --

I'll post your question for everyone to respond to. Check back late next week.

[Rod Ferguson]

HMMM - I gather that you need to sell your home as part of a move, not that you just don't like being upside down on a house or aren't about to go through foreclosure. Unfortunately, there isn't much you can do. Your choices are basically:

1) Throw more money at your mortgage to bring it at least in parity with the value and continue to live there.

2) Sell at a loss, pay the difference to your bank and move.

3) Talk to your bank and see if they will forgive the difference; if you have a good record of payments and good credit, you might be able to do this. Bear in mind there will be fees and you'll have to pay income tax on the forgiven amount.

4) If you can rent it out at a rate to cover the mortgage, do so and rent in your new city.

5) If you are about to go through foreclosure and do wish to stay in the house, then Chapter 13 bankruptcy would be the best option. If you choose this option, best to get the bankrupcy attorney before foreclosure proceedings begin.

6) If you are about to go into foreclosure and you want to leave, go find a short sale specialist and see if you can get the house sold prior to foreclosure. If you can, the specialist will work with the bank to accept the sale price instead of the full amount; you'll have to pay fees and income taxes on this as well.

None of these solutions are painless or without consequences, but you have options.

[HMMM]

Naw, we are nowhere near foreclosure and can afford two mortgages. Would not even qualify for bankruptcy. I hate renting it out because in Vegas renters wreak the houses for thousands of dollars of damage. Seen that every day.

Should we just close it up and hold it till market recovers? Spending about 24K a year to hold it in mortgage and costs. Yeah I wish I had that in lump sum to throw at the mortgage, but I dont and no, foreclosure is not an option.

[Rod Ferguson]

Well, I wouldn't close it up for three reasons: the house becomes a real liability that will drag the rest of your finances (paying out and getting nothing in return), an unoccupied house is a magnet for vandals and damage to the property might go unnoticed until too late (a pipe bursts flooding the house that isn't noticed for a week or so - bye bye house). If you are sitting as comfortably as you say, then renting would be the best option. Do you have any co-workers that are looking to rent? Anyone from your church (if you attend)? You may wish to consider hiring a property management company to handle renters and repairs; they aren't free, but they remove the burden from the homeowner of becoming a landlord.

[Ck]

Read in the paper a couple of weeks ago (did't save it) that there was talk about loan programs with GOV assistance (??) that essentially allow a pesron to get back to the the 80% loan to value ratio, which means the lender is forgiving part of the debt, (I assume).
My house was worth $600,000 when I bought it. I owe $450,000 after putting $150,000 down. Now it's worth $410,000 and I need to refi and can not. If the values do not go up and I do not qualify for an upside down loan, I will lose the house. I am making payments and will continue until the balloon comes due then I'm history. Does anyone know about a government sponsored program or other? I put all I had as a down thinking that it was equity.

[Ck]

Loan modification: This would be a permanent change in one or more of your loan's original terms. The rate might be cut, the payment period extended or both so that the payment once again becomes affordable.

What are the best ways to convince a bank to give a Loan Modification

[Frances Reilly]

What are the best ways to convince a bank to give a Loan Modification

I can afford to pay my mortgage at the moment, but I need more advise on the availble programs that are out there

[Don't Assume]

Don't ASSUME that if someone is upside down it's because they were irresponsible and bought their place with a no-money-down loan.

SOME of us put down 10 to 15 percent, even 20 percent, and are upside down because this market is really that bad. That is my situation. I bought a home for $270,000 that was appraised around $300,000. I put down 15 percent and the home value has dropped below that.

Now my finances are tied in a depreciating asset.

[Laurie]

I agree with the above post. I have a mortgage of $270K for a house that was worth $320K when I bought it in 2005. Now the house is probably worth $265K. So I put down 15% and lost 20%. I hope I can recoup enough money to refinance or move in 2013, when my rate readjusts. That being said, I'm glad I had some $ in down payment money or I would really be sunk.

[Mark]

Info needed. I have a loan for $315,000.00 and the payment is $2,400.00 a month. Adjustable at 7.25% interest only. And is going to go up. I put down over $50,000.00 on this house when I sold my first house. I have been here 5 years and business is slow and I just can't come up with the monthly payment anymore. I just missed my August payment, first late payment I have had. Any advice...i do A/C work and I'm slow now and in winter in So Cal its going to be even worse to make a payment. I have some money but not enough to get a loan.

[fallen jedi]

I'm also looking for advise. I bought a condo worth $430k in 2005 with 0 down. I've refinanced once.

My problem is that the appraised value has dropped to $280k now - there are at least 3 foreclosures in the same complex as me. My mortage adjusts in early 2010, but my main problem is that I have a baby on the way in 2 months and I live in a nice area but have been zoned for the WORST school district so I'll need to move before the kid turns 5.

I'm very concerned that it will take 10+ years for values to go back up. If I keep throwing good money after bad, why not walk away and do a forclosure now...

[Low Rider]

Jack up your insurance and leave the iron on one day... I feel that the insurance companies are going to get hit fi ppl find a way to get out of their homes... I live in Miami and i can just see a hurrican hitting here and were all worst off than a third world country or New Orleans

[Dana]

Thanks to some for reminding people that plenty of us responsible buyers are now upside down too. I bought a house near Detroit for $130k in 2001, with 20% down and a 15 year mortgage. Even still, with houses in the area now selling for between $5k-$50k - I'm underwater a LOT. We had to move 3 years ago, and looks like we'll keep renting it out forever, since the Obama rescue caps out at 105% loan to value. I guess I don't mind a plan that helps others stall foreclosures, because they are wreaking havoc on the value of my home, no matter what I do. But I wish there was help out there for us too..

[jeremy]

we currently owe 175,000 on a townhouse worth 150,000, we would like buy a bigger house but don't know what to do... rent this townhome, and buy another, can we buy another house(which we plan on staying in for awhile) and take out a loan on that to pay the difference on the townhouse and sell that? is that possible?

[Don]

I currently am buying a home that 2 years ago was valued at 140,000 and since the recession has been devalued to 75,000. The note was through CountryWide but has been purchased by Fannie Mae. After repeated calls to CountryWide I find that President Obama's plan has no provisions for people like myself. CountryWide has promised to look into a plan that will drop my PMI and therefore allow me to become eligible for a refinance. Basically what I'm seeking is a reduction in the loan amount but CountryWide currently has not such programs available. I have NEVER been late with a house payment but I can't see the good in paying 60,000 more for a home that has been devalued by nearly 50%. Seriously considering just walking out and leaving it to the discretion of CountryWide.

Bumpage (or b*) is the act of pulling your credit reports over and over in order to delete old inquiries. Basically, the outdated systems used by Equifax, Experian and TransUnion can only hold so many inquiry requests on your credit file. Once the system fills up, the oldest entries start getting deleted, thereby reducing the number of inquiries on your credit. Bumpage is probably not legal, so I don't recommend it. However, if you are simply fanatical about monitoring your credit on a daily basis, them...