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Also known as an underwater mortgage or an upside down mortgage, a negative-equity mortgage is a mortgage that has a current balance that is higher than the current market value of the property the serves as the collateral on the loan. This type of condition may take place when changes in the economy have the effect of driving down property values for a period of time. When this type of situation occurs, homeowners have several options for dealing with a negative-equity mortgage, including refinancing, loan modifications, or simply hoping that the downward trend of property values will eventually reverse.
One approach to dealing with a negative-equity mortgage is to do nothing. Assuming that the homeowner is not having trouble making the monthly payments, and there are signs that the general economy is improving, choosing to focus less on home equity and more on retiring the debt may be a viable option. This is especially true if there are indications that property values will begin to rise once more over the next two to five years. At some point, the negative-equity mortgage will no longer be underwater and the homeowner will once again enjoy some equity in the property.
A second strategy that may be used to deal with a negative-equity mortgage is to consider refinancing. This method is particularly effective if the average interest rate is lower than the current rate on the homeowner’s underwater fixed-rate mortgage. In some cases, this may require liquidating assets to supply a down payment on the refinancing that brings the total amount mortgaged to a level that is acceptable to lenders. The end result is a new mortgage with a lower fixed interest rate, which may result in lower monthly installment payments, shorter duration to the mortgage, and ultimately save the homeowner a great deal of money.
Loan modification is a third alternative that may be helpful in dealing with a negative-equity mortgage. Here, the goal is to work with the current lender to come to some type of compromise that both parties can live with. This approach is often helpful when the homeowner is struggling to keep up current payments on the negative-equity mortgage, in that the modification relieves part of the stress on the household budget. At the same time, the lender reduces the risk of having to foreclose on the property and spending a great deal of time and resources on the eviction, foreclosure and subsequent attempts to sell the property to a new owner.
There is no one method of addressing a negative-equity mortgage that is ideal for every economic climate or situation. Homeowners who are dealing with an underwater mortgage loan should consider every alternative that is appropriate for their circumstances, taking into account changes in household income, the state of the local and national economy, and the rate of descent that is occurring with the market value of the property. In many instances, seeking professional financial advice will make it easier to look at the situation objectively and determine which course of action is in the best interests of the homeowner in the long run.