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The falling home values that came with the mortgage market crash and recession have resulted in a number of homes showing negative equity. These underwater mortgages could possibly put a strain on the economy if they result in foreclosure. However, it is not a foregone conclusion that foreclosure will result when you have negative equity.
For the most part, those at greatest risk of foreclosure due to being underwater are those who have run into financial problems and can’t get a refinance because of their negative equity. If you are underwater on your mortgage, you have more options than you might expect. Here are 5 possibilities for your financial situation if you’re underwater on your mortgage:
- Keep making your payments: If you can afford your mortgage payment, and you aren’t planning on moving anytime soon, it might be worth it to just keep making your payment. If your home serves as shelter, you are comfortable in it, and your financial situation is reasonably secure, eventually you will no longer be upside down. You will pay off your mortgage eventually, and then you will own your home outright.
- Mortgage modification: You might qualify for mortgage modification. This can be helpful if you are having difficulty making payments. At the first sign of trouble, contact your mortgage lender to apprise them of the situation. If you qualify for a mortgage modification, things could work out so that you end up with a payment you can afford, allowing you to stay in your home.
- Sell the house: If you can find a cheaper situation, it can make sense to sell the house. You will have to do a short sale in order to do this if you have negative equity. In a short sale, the bank accepts less than you owe for the house. You are either forgiven the difference (watch out: the IRS considered this taxable income), or you are offered an unsecured loan for the remaining amount, and you make smaller payments on this smaller loan.
- Strategic default: Some who are underwater on their mortgages, and who feel as though they can’t make payments and get out of the problem, are choosing to walk away, rather than stick it out. Of course, your credit will be in danger with this option. However, you can still live in your home until the bank forecloses, and you can save up some money since you won’t be making payments anymore.
- Bankruptcy: Another option is bankruptcy. If you have a lot of other debt, and you have assets in retirement plans, this could be an option. If you keep current on your mortgage, you might even get to keep your house as you restructure the rest of your debt. But your credit will be completely trashed for the next seven to 10 years.
Before you go forward with any of the above options, though, it might be worth it to consult with an attorney, as well as a financial professional. You want to make sure that you understand your options, and the implications of your actions.