Did you know that at the peak of the Great Recession in the United States, about a quarter of homeowners were underwater on their mortgage? Fast forward to 2020, and only 6.2% of homeowners are now considered seriously underwater. But that still amounts to a lot.
What Does Being Underwater on Your Home Loan Mean?
When you are underwater on your home loan, or upside-down, it means you owe the lender more money than your home is essentially worth. For instance, if you purchased your home for a sum of $300,000 and made a 5% down payment of the loan. That leaves your loan balance at $2,85,000. If the local housing market has dropped and your home, after 3 years of taking the loan, is only worth $225,000, you will find yourself underwater on your mortgage.
What to Do if You Are Underwater on Your Loan
Keep Calm and Continue Repaying Your Loan
In many cases, the best option is to simply continue making your regular payments. It’s likely that over a period of time, the problem will solve itself, given that your home equity will, in most cases, rebound. Remember that housing markets usually appreciate over time, even if there occasional dips in value along the way.
Repay Your Mortgage Faster
If you are still losing sleep, consider making extra payments towards your principal, so you pay off your mortgage faster, without spending too much money on interest. You could do this by adding some extra money every month towards your monthly payment.
Request for A Loan Modification
Remember that lenders face a guaranteed loss if they foreclose an underwater home. That’s why they don’t mind offering underwater homeowners a loan modification. Of course, you should not be expecting the lender to modify the terms of the loan for your benefit – they are doing it for themselves at the end of the day. Still, it could help bring down the cost of the loan, which, in turn, can help your situation.
