Unfortunately, you never know what the housing market is going to do. Whatever the housing market is doing can affect you and your mortgage. One of the things that can happen to you is an underwater mortgage. An underwater mortgage occurs when the balance of your mortgage is higher than the fair market value of the property. Underwater mortgages were very common after the housing market crash in the late 2000s. During this time, many homeowners found that their homes lost a considerable portion of their value.
Problems caused by Underwater Mortgages
Difficulties in selling your home
An underwater mortgage can make it very difficult to sell your home. If the property is underwater, the sale price won’t be enough to help you pay off your debt. This makes it difficult to sell the property unless the homeowner has the cash to pay the loss out of pocket. A lender may agree to do a short sale. However, even if a lender agrees to do a short sale, the homeowner may end up with a deficiency judgment, which is an unsecured money judgment against a borrower whose sale didn’t get enough funds to pay the loan in full.
No refinance option
An underwater mortgage can prevent someone from refinancing their debt. Refinancing is when you get a new mortgage to replace the old one. Having an underwater mortgage makes homeowners unable to get a new loan with favorable terms. This is because the current value of the home is not enough to act as a security for the new loan.
High risk of foreclosure
Having an underwater mortgage leads to a high risk of foreclosure. Foreclosure is the act of a lender seizing a borrower’s home after they fail to make payments. If you become unable to pay for high monthly mortgage payments, there is a high risk that your house will be foreclosed upon.