Rising home prices have helped reduce the number of Americans to own homes with negative equity (aka “underwater” mortgages). In the third quarter of 2012, 10.7 million homeowners owed more on their mortgages than the value of their homes, down from 10.8 million in the prior quarter, according to a recent CoreLogic report. “There has been steady progress relative to reducing negative equity and its effects in 2012; but, with nearly one quarter of [mortgage borrowers] still underwater we have long way to go,” said Anand Nallathambi, president and CEO of CoreLogic, in remarks to the report.
More often than not, borrowers wait until it is too late to do something about their financial situation, which eventually puts their homes on the line. What they should have done was alert the lender as soon as they questioned their abilities to sustain their mortgage.
Due to the large amount of home loan in jeopardy, many lenders already have viable options in place to make hardships not as difficult, which will protect your loan, your credit and your home.
Avoid penalties & foreclosure
With mortgages rates on a gradual decline, underwater mortgage borrowers should consider refinancing to reduce the size of their monthly payments and interest costs.
When speaking with a mortgage lender, you should ask about your eligibility for any of the several government programs developed to help those with financial hardships, compromising the ability to make monthly loan payments. The programs, referred to as HAMP (Home Affordable Modification Program) and HARP (Home Affordable Refinance Program), offer refinancing help when you are behind on your mortgage payments or when you need your monthly loan payments lowered.
Some lenders can help you when you are facing trouble and some will offer financial relief even after you’ve already missed payments. Don’t wait to find out though. The best chance you have for getting help is by asking — and asking early.
Even if you are underwater with your home mortgage loan, you can make a comeback. Sit down with your income and expenses and see why you are unable to make your loan payments.
Many people find they are able to make ends meet and get their mortgage back on track just by changing their spending habits and being more consistent with money management. This may include giving up the things you want in your life such as vacations, entertainment, and extras. If you discover after tightening the purse strings it still does not help you reach the surface from an underwater mortgage, you may need to act quickly to find a supplemental source of income.
Another step is to downsize to a more affordable place to live — escaping the burden of having to make mortgage payments on a home with negative equity.
It can be tempting to just walk away from the property and let the bank have it, but you are putting your future financial abilities at risk by completely defaulting on your responsibilities. This kind of inaction can follow you for years to come. You’ll lose any money already invested in your home. It is better to work at getting your mortgage paid up to date and selling the property than taking such a loss.
A lesson learned
Understandably, it is impossible to predict when home values come crashing down. The best way to address such a possibility is to be prepared financially. This means using conventional methods such as establishing an emergency fund and making extra mortgage payments to reduce interest costs.
Stay in touch with your mortgage lender during the tighter months or if your financial situation changes. If you get sick or lose your job, you’ll want to establish an open line of communication right away. Lenders will likely be willing to help, provided you are upfront and honest about your situation. If they have to chase you down and spend their resources on you, they may not be as willing to help you deal with the unexpected.