What can you do if the value of your home is less than what you owe?

Your house in the Banks hands

One would think that the biggest reason people get denied a mortgage refinance would be bad credit.  We all see in the news “Credit Crisis”, “Mortgage Meltdown” and other scary phrases that inspire ratings and keep people tuned in to watch what bad thing will happen next.  The “Credit Crisis” is talking about banks having liquidity issues.  This means they don’t have enough cash on hand to lend money on mortgage loans like in the olden days (18 months ago).  The places banks used to borrow from dried up.  This means they have limited cash and thus are being very selective of the borrowers whom they are willing to risk loaning money.  Its basic supply and demand, they have a small supply of money and all of America needing to refinance and purchase.  

The Cause and Effect
Cause: People need to refinance their short-term fixed loans and are unable to.  Their loan adjusts up and they fall behind on the payment.
Effect:  Their house goes into foreclosure.  It is then sold for pennies on the dollar.  This drives down the prices of surrounding homes.  This then makes your home worth less than you owe on it.

Here are some good, bad, and maybe ugly options you have in your arsenal of choices.

1.  Hold down the fort until the market recovers:  If you have the financial wherewithal to press through the market adjustments, then this could be your best choice.  My crystal ball thinks we will hit the peak of foreclosures mid 2010, and then see normal increases in home values (1%-2% per year)
2.  Re-negotiate your mortgage:  If you are looking at the financial race we are in, and determine you are going to run out of money before the finish line, then this is an option you just can’t ignore.  The Home Mediation Center offers a free consultation that is one of the most helpful option finding solutions in Portland.
3.  Throw caution to the wind and try and refinance:  If the value of your home is on the bubble, you may want to discuss a refinance with your mortgage broker.  There are government loans that go to 105% of the value of your home.  If you take this option, make sure you put some lip stick and rouge on your home, i.e. fix the gutter, mow the lawn, get rid of the raccoons under your back deck, stuff like that.
4.  Walk away:  This is called “strategic default on mortgage loans” and I don’t advise this, nor recommend this option!   I personally believe it to be wrong!  That being said, according to the Financial Trust Index, around 23% of foreclosures fall into this category of “strategic defaults”.  Unless you truly have no other option, then it would be a good idea to sit down with a mortgage or real estate proffesional and get some advice.
5.  Do nothing:  This involves a series of choices that lead to the point of deciding on a path that goes to your couch, remote, and a beer or whatever you decide “nothing” is to you.  If you don’t aim at a target, you don’t have to worry about missing.

If you, like millions of our fellow Americans, are in the predicament of being upside down on your home value, then these are your options.  If you need help deciding on the best course for you, then talk with a mortgage professional in your life, if they are still in business, then they most likely know their stuff.

Always, my office and staff are open to answer any questions you may have. 

Written by:
Scott Schneider
Please send questions to scott@tmms.com or go to www.scottschneider.info