In this series, I detail six possible ways to deal with an “underwater” home—one that’s worth less than the amount of money owed on it. Here is the first part of my six-part series.
Javier Gonzales is still legally a homeowner. But when people ask him if he owns a home, his first instinct is to say “no,” he says. He’s still paying the association fees and insurance on the townhome he bought in 2007, but he stopped paying the mortgage nearly two years ago, and he no longer lives there. “I don’t care about it, I don’t want it,” he says. Gonzales owes about $476,000 on a home worth roughly $263,000.
Gonzales is just one of millions of homeowners whose homes are worth less than they owe on them. Just under 23% of all residential properties with a mortgage were in negative equity, a.k.a. “underwater,” at the end of the first quarter of 2011, according to CoreLogic, an information and business services firm. Across the country, the amount these homes were underwater averaged $65,000, though in some states that figure was much higher; $129,000 in New York and $93,000 in California, for example. A recent Calculated Risk Blog post points out that “the value of household real estate has fallen $6.6 trillion from the peak—and is still falling in 2011.”
That’s a mind-boggling amount of home equity that has been wiped out in the past four years, and an astonishing number of homeowners who are stuck in homes that they can’t sell without bringing a big chunk of cash to the closing table.
Frankly, though, statistics don’t mean squat when you are the one writing out checks every month to pay a mortgage that’s much larger than what you could sell your home for. What are your options in this kind of scenario? I’ve come up with six possible ways to deal with an underwater home, and will detail them in this series. Here is the first.
Option #1: Stay and Pay
If homeownership was simply a financial decision, we’d probably see many more foreclosures and short sales than we do now. After all, why keep throwing money at a bad investment? There are myriad reasons why people continue paying their mortgages even though it may take years—or even decades—to get back to the point where the home is worth more than what’s owed. Whether it’s a sense of obligation to live up to the contract they signed when they purchased the home, a strong attachment to the place where they have lived and perhaps raised a family, worry about damage to their credit rating by not paying, or just plain resignation, many homeowners are going to just keep on writing out that check each month and hope for the best.
The benefit of this approach is that you don’t have to be concerned about others finding out about your financial difficulties or find a new place to live. But there are some important questions to ask yourself, with the main one being whether you are just postponing the inevitable. You may be keeping the wolf from the door, but he may be lurking not far away. And financially, you may pay significantly more to keep your home than if you rent, and perhaps later buy a less expensive home.
Cathy Moran is a bankruptcy attorney in California who deals with a lot of underwater mortgage situations. “I am spending a lot of energy talking people out of homes on which they are spending too much money and have no hope of having any equity in for at least a decade,” she says.
Moran suggests homeowners who are underwater compare the monthly mortgage payment, plus carrying costs like repairs, homeowner dues and taxes, to the cost of renting. “If that investment (the home) is in a black hole you might as well flush twenty-dollar bills down the toilet,” she says.
But despite that logic, Moran finds it’s not easy for her clients to let go of their homes. “We have instilled unrealistic emotional value in a home,” she says. “The home is now on the same level as the flag and motherhood. But it’s just housing.”
If you decide to stay and pay, you may be able to get financial help to catch up with payments if you run into a financial hardship. For example, the Emergency Homeowners Loan Program (EHLP) is providing interest-free loans that may be forgiven over time to homeowners who have fallen behind on their mortgages due to job loss, unforeseen medical bills, etc. Because these programs change frequently, it’s a good idea to work with a HUD-approved housing counseling agency in your area to find out which programs may be available.
Other options for homeowners with “underwater” mortgages:
- Underwater On Your Home: Stay and Pay
- Underwater On Your Home: Refinance
- Underwater On Your Home: Get a Loan Modification
- Underwater On Your Home: Short Sale
- Underwater On Your Home: Walk Away / Foreclosure
- Underwater On Your Home: Bankruptcy