About 11% of those who borrowed to purchase a home last year owed more than the properties were worth as of February, according to a report from data firm Black Knight. That’s far higher than the 1.42% for the market as a whole.
As home prices and interest rates both continue to rise, borrowers are struggling to meet down payments, therefore relying on borrowing options like Federal Housing Authority (FHA) and Veterans Administration (VA) loans, which require much lower down payments than conventional loans — typically relying on principal pay downs and price growth over time to improve their equity positions.
According to the report from Black Knight, the FHA and VA Veterans Affairs guaranteed or insured almost 75% of upside-down mortgages in 2022.
An upside-down mortgage, or an underwater mortgage, is a home purchase loan with a higher principal than the free-market value of the home.
How to Know If Your Mortgage is Underwater
In order to find out if you are upside-down or underwater on your mortgage, you must conduct an assessment of your home’s current value through a home appraisal. An appraisal considers your home’s condition and amenities, plus the value of homes like yours that have recently been sold nearby.
You can also use a home value estimator tool to get a ballpark idea of how much your home is worth.
What To Do If You’re Underwater On Your Mortgage
If you find yourself in this position, you have several options.
- Stay in the home and build equity. During this time, it might be beneficial to make extra payments on the principal balance of the loan while waiting for the market to improve.
- Work with your lender on a loan modification. Because you’re underwater, there may not be any refinancing options available. However, you may be able to find a solution with your lender or institution, depending on the circumstances.
- Consider a short sale. A short sale could allow you to avoid foreclosure and move to a more affordable housing situation.
- Sell your home and pay off the remaining mortgage balance.
Related: Should You Pay Off Your Mortgage?
It’s important to weigh the pros and cons of each option, and consult with a financial professional before making a decision. Our team of professionals are always available. You can book a complimentary consultation below.
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Bautis Financial Advisor Commentary: April 10, 2023