100 Words On: Why Having an Upside Down Mortgage Ain’t All Bad

One of the biggest fears many homeowners have is waking up one day and discovering that they owe more on the mortgage than their house is actually worth. While that may be trouble for those who absolutely positively have to move, it’s really no big deal for those who don’t — so don’t panic. Unlike underwater stocks, homes with upside down mortgages still have intrinsic value. Remember, you can only lose money on an upside mortgage if you sell.

The bottom line: Selling your home simply because you owe more than it’s worth is foolish — especially if it’s meeting your needs.

Photo Credit: Thomas Quine

Comments

  1. 1

    Steve says

    It’s human nature to want to unload an asset after its paper value goes negative. If you look at your home as if it were similar to a stock, then selling when your home is undewater is equivalent to locking in your losses. You end up buying high and selling low.

    • 2

      says

      I agree with Steve. Whether you wait or go ahead and sell (locking in the loss) the home owner is still beholden to the loan until the market eases up. Many financial decisions probably can’t be made due to the “albatross” around the proverbial financial neck. It’s a burden. Sure, we can discuss what’s relative but what’s real is today’s reality and it sucks for many homeowners.

  2. 3

    says

    Save on the taxes while you still live in the house – what’s not to like?

    Yes, in aggregate, it decreased the mobility of talent, but hopefully any underwater houses are a temporary thing. I’m rooting for my price to drop as we speak, haha.

    • 4

      Len Penzo says

      Time is a great healer. I bought at the top the housing market in 1990. Couldn’t have timed it any better. I think the actual market top was three months after I bought, but the damage was done. I was upside down for seven long years; I didn’t panic and stayed the course — although for awhile I did consider bailing out. I’m glad I didn’t. The good news is I finally got out from under that home with no loss, and then I bought near the bottom of the next housing run-up in 1997.

  3. 5

    says

    The real problem of a home with an upside down mortgage is will the property go positive again or in the near future. There is a lot of talk that it may never get to even. There lies the problem.

    • 6

      Len Penzo says

      Never is a long time, KC. Over time, folks will eventually pay down their mortgage balance to a point where it will be worth less than the home’s market price.

  4. 7

    says

    I whole-heartedly agree with the last sentence.

    I do think it’s pretty bad being upside down in certain instances. Like for me, it sucks. I have a ridiculous rate on my mortgage (6.875%) and up until the time when the government finally decides to release the new HARP requirement to banks, I have absolutely no possible (easy) way to refinance.

    • 8

      Len Penzo says

      Everything is relative, Eric. When I bought my second home in 1997, I would have been very happy with that 6.875 percentage rate. When I bought my first home in 1990, the interest rates were double digits.

      • 9

        says

        I hear that! That’s why I made sure to put certain instances in there. I’m sure, even now that may look attractive to a number of people who got slammed with double-digit rates when their original low-rate ARM adjusted a couple years ago. At least back then, interest rates on bank accounts were significantly higher too.

    • 11

      Len Penzo says

      I got the photo from Flckr. I believe it is an actual home in Germany. Take a look at the rain gutter — it is correctly positioned on the “roof.”

  5. 12

    says

    I agree, don’t sell just because you are upside down. But sometimes life is more complicated than just that. People get divorces, or relocating for a job, or just moving in with someone else. I guess renting it out is always an option.

    • 13

      Len Penzo says

      Yep. If you have to sell when your mortgage is upside down, then it can get a bit messy — and expensive.

  6. 16

    says

    I couldn’t agree more Len. So many people get mad and feel ripped off because their house isn’t worth as much as it once was. When a home can be a risky investment too unfortunately. You are right, no need to panic unless you need to move. At the same token, I could scream and cry about how bad my retirement funds underperformed last year, but no point. It is what it is.

    • 17

      Len Penzo says

      It’s kind of ironic, but as I get older, I don’t seem to obsess over my retirement fund performance as much as when I was younger (and much farther away from retirement). I wonder why that is.

  7. 18

    says

    I guess “selling” at a loss is a bad thing but our system makes it so easy to (and not punitive enough to deter people from) walk away (strategic default). This makes no sense to me if you plan on staying in the area. So, you’re making payments on something for more than it’s worth. So what, you can afford it and have a place to live. For people who have to move for employment or other reasons though, the system isn’t much of a deterrent. Better yet, many are living 1, 2 and even 3 years completely mortgage-free. The backlog with the banks is so bad they just can’t evict people in a timely manner. I suppose if the alternatives were more bitter, we’d see less of this. For now, I’d expect it to continue.

    • 19

      Len Penzo says

      I, too, don’t think things will change anytime soon. I’m not sure how to make strategic defaults more punitive. I believe strategic defaults will trash one’s credit for seven (or is it 10?) years right now. There ain’t much more that can be done short of debtor’s prison.

  8. 20

    says

    From a financial independence point of view, whether your house is underwater or not is irrelevant.

    What matters is eliminating your consumer debt load and your ability to build a diversified investment portfolio. If you can do these things while living in an underwater house, so be it.

    A house is a ‘living appliance’. It provides utility in the form of holding your stuff and protecting you from rain, snow and tiger attacks.(depends on where you live)

    Markets are cyclical. In a few years your underwater mortgage might be transformed into a nugget of actual equity. Who knows?

    -WR

    • 21

      Len Penzo says

      I like the “living appliance” angle. That’s a neat way of putting it!

      I do think this market has another five to ten years – depending on when government stops artificially propping it up – before all the excess is wrung out of the system however.

  9. 22

    says

    That is an AWESOME house! I thought it was Photoshopped too, but you’re right — the gutters are placed correctly, and it has supports near the foundation. Plus the “roof” is sloped correctly (if it were a real house digitally flipped upside-down, the “roof” would be an unsloped foundation).

  10. 24

    says

    One thing I would like to point out is that there are refinancing programs for people you are underwater and the best part is, it doesn’t matter how underwater you are. The programs help borrowers who have been paying on time get a lower interest rate on their home. For most homeowners with a conventional mortgage, the HARP 2.0 program is available to them so long as they meet the guidelines. For homeowners with an FHA mortgage, the FHA Streamline Refinance is available to them so long as they meet the guidelines. If you purchased your home before mid-2009 and pay your mortgage on time, you have a high likelihood of qualifying.

    So, even if you are underwater, you can take advantage of the historically low interest rates and but money back in your pocket each month.

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