Although this used to be a rare occurrence, it is growing more prevalent as the real estate meltdown reaches its peak. Home owners with adjustible-rate mortgages, in particular, are discovering that their home’s value is less than what they owe on their mortgage. If you aren’t planning on moving any time soon, this isn’t a problem—time will fix it—but if you need to sell your home immediately, you could have a big problem on your hands.
High interest rates are the most common culprit when your home’s value is less than the mortgage. Most of your monthly payments have gone toward paying off the accrued interest, which means that you’ve built very little equity in the house. You have a few options, none of which are incredibly attractive, but you have to be proactive if you’re forced to sell your home before it outweighs the mortgage.
Apply for a Short Sale
Your first option when your home’s value is less than the mortgage is to apply for a short sale. Essentially, this involves asking the lender to forgive the portion of your debt left over after you sell the house for market value. Some mortgage lenders will be more than happy to cut you a break because it costs them money to foreclose on your house. However, you have to be able to demonstrate a legitimate financial hardship.
The most important thing to remember about this option is that you have to take care of it quickly. Mortgage lenders are far less likely to approve a short sale if you’ve already missed a few mortgage payments, so make sure to determine your home’s value and contact them right away. Explain your hardship, then ask what your options might be, letting them make an offer before you give suggestions.
Rent Out Your House
If you live in an area where renters abound, you might be able to solve your problem by renting it out to tenants. When your home’s value is less than the mortgage, your goal should be to pay off enough of the mortgage to get out of the red (in other words, a cash-positive situation). If you rent out the house, the monthly rent will pay your mortgage, and you don’t have to worry about expenses.
The problem with this scenario is that you’ll have to find a new place to live, which means paying rent yourself. The rent should be less than what you’re currently paying for your mortgage so that you don’t default on that financial obligation. Furthermore, it can take months to find suitable tenants, during which time you’ll have to find a way to pay your bills.
Wait it Out
If possible, you should stay in your house until the home’s value is more than the mortgage, which might be difficult. On loans with high interest rates or ARMs, it could take years before you start building actual equity, especially if the housing market continues to decline. With the excess inventory waiting for sale, it isn’t a good time to get rid of your house anyway.