You may or may not have heard of the term being "upside down on a mortgage." It's also referred to as having a mortgage that's underwater. Some say it's only a problem if you're trying to sell your home, but whether you are or aren't looking to sell, it's a situation that you don't want to find yourself in.
What it means to be upside down on a mortgage is that you owe more money on your home than it's actually worth.
Homeowners can get into this situation for a couple of reasons..
- You purchase property in a promising neighborhood/area. This can happen if you purchase a home in an area that is said to be up-and-coming but ends up not performing like it was intended. The growing area (and the properties within it) aren't worth as much money as it was anticipated, or even as much as you paid as an early investor.
- You pay too much for a home. You can also have an upside down mortgage when you pay too much for a home. In this case, you already paid more than it's worth and can't anticipate that someone else will also overpay if/when you choose to sell.
An upside down mortgage is not a fun situation to acquire but it's also not an impossible one to escape. Here are some things you can do to cope with
these circumstances and hopefully (eventually), recover a "right-side-up" mortgage.
- Buy a new property and rent the old one. If you have the money to do this, it's a great option. You can rent the property until the market turns around and you're able to sell it for profit or until you can simply break even. If your mortgage payment is too high to charge for monthly rent, consider refinancing to make up the difference.
- If you aren't able to afford the purchase of a second property, you can continue living in that property and making payments until the market turns around. This may not be your most desirable option but it'll allow you to work towards paying off your debt and reselling it once the market is leaning more in your favor.
- HARP (Home Affordable Refinance Program). This is a mortgage assistance program through the federal government that allows certain borrowers to refinance their mortgage, even if it's upside down. If you're interested in learning more about this, talk with your mortgage lender and see if this may be able to help you.
If you're in a situation where your mortgage has gone underwater (upside down), consider your options and determine which one is best for you long-term. Although it's unfortunate, having an upside down mortgage doesn't mean financial failure. There are options available to improve your circumstances, the first step is educating yourself.