Under Water Mortgages Explained
We Often Hear This Term When It Comes to Mortgages
We thought we should clarify.
What Is It?
A mortgage is considered “under water” when the property is worth less then what is owed to the bank.
For example: Purchase price 150K with a down payment of 20% or 30K. Mortgage amount is 120K. Say home prices fall in this region & the home is now worth 100K. This property is 20K underwater.
Many people choose to continue paying their mortgage as fluctuations in market value are just that. Fluctuations. It’s not good to have no equity, however, it can climb back up as the market turns more favorable.
In the aftermath of the housing boom prior to 2008 many people borrowed more than they could afford due to the less stringent mortgage requirements at the time including buying a home with no money down. The increased amount of demand resulted in higher home pricing. On top of borrowing more then they should have many of these mortgages were adjustable rate…meaning in 3-5 years time the interest rate can jump. A significant spike in your interest rate can make the payments much higher then they were & often times rendering the monthly payment unaffordable.
When the mortgage rates adjusted many people found they couldn’t keep up with their payments or refinance into a lower interest rate to result in a lower monthly payment because the equity was no longer there.
Why It’s a Drag on the Housing Market
Some people literally find themselves “stuck” in a home. They are unable to sell & “bring money to the table” or refinance because of a loss of equity. This has caused a lack of inventory in some markets as well as a glut of foreclosures or short sales which come with their own set of issues.
Philadelphia fared relatively well during the housing crisis because of our diverse job industry & affordable housing stock. We DO seem to be suffering from a lack of inventory.
If you have an issue with your mortgage; there are some interesting programs designed to help people in these particular situations refinance or you could potentially pursue a strategic short sale. The lack of inventory has also helped turn this market more in the seller’s favor. If you would like to receive a Comparative Market Analysis or have any questions regarding your mortgage contact us today!