Homeowners across the country are finding that their home values are plummeting. Some are so low that their actual present home value is less than what they actually owe on their mortgage. In this scenario, their mortgage is considered to be “upside down.” If you are in a similar situation where you are upside down and have negative equity in your mortgage, there are options for you.



How an Upside Down Loan Arises

First, how does a home enter into a negative equity situation? Usually this happens when homes have a high leverage. This means that you, as an owner, have loans that equal almost or as much as 100% of your home's value.

Most lenders are capable of approving high-leverage loans on homes because of the assumption that real estate, on average, continues to appreciate about 3% to 5% every year. Note that the average appreciation is calculated over many years, during which there will be periods of appreciation and small periods of deflation. Over the last few years, we have seen a dramatic depreciation of home values. Though some home values have dropped, it is expected that they will once again see appreciated value within a few years.

What Should You Do with a Negative Equity Loan?

If you are a current homeowner with depreciated property value and an upside down equity in your mortgage, should you just walk away and let your home be repossessed and foreclosed by the lender?

The best strategy for any homeowner is to continue making your mortgage payment no matter how hard it is financially. This keeps you in good standing with your lender and prevents your credit history from becoming marred.

You could also refinance. Interest rates have been dropping every month as the Federal Reserve continues to lower the federal interest rate near zero. This is a good time for a homeowner to get a great interest rate on a new loan that can help drop monthly payments to more affordable levels. However, refinancing a home in an upside down status may require additional monies up front in order to lower the loan balance to match the current home appraisal value. If you can provide these funds, you could save hundreds of dollars on your mortgage payment with a new refinance.

However, if you are in an extreme financial crisis and cannot meet your monthly mortgage obligation, is it best to just let your home foreclose? A foreclosure will be a part of your credit record for the next 8 to 10 years and can prevent you from obtaining another home loan during that time. Your credit rating can also affect your ability to obtain credit cards, personal loans, an apartment rental agreement, and even a job.

If there is absolutely no way to continue making payments and you must get out of your mortgage, ask your lender to agree to a “short sale.” A short sale is where your lender allows you to sell your home for whatever market price you can get, and they will agree to write off the negative balance after you give them the proceeds from the sale. Though you walk away from your home and get nothing in equity value, you end up owing your lender nothing and your credit history is safe.

Walking away from your home is one of the most difficult decisions you have to make. Be sure to talk with your lender to discuss your options before you allow foreclosure to affect you.

This article is intended for general information. Always seek sound financial and legal advice before making any financial decision.