So you are upside down on your mortgage, and you are starting to sweat. You see the equity that you had in your property turn into negative equity, and you realize that something has to be done. Unfortunately, in all actuality, there is nothing that can be done. Your house and your houses equity (or lack there of) are at the whim of the invisible hand of the market. When this happened several years ago, people began giving up on their homes, also known as strategically defaulting. People were walking away from homes and trying to sell at a rate that only further moved the prices down due to the increased inventory. Here is what I believe would have been the better solution:
My advice to almost everyone that was experiencing a declining home value would have been to stay put, and continue to make their monthly payment. Do nothing out of the ordinary! The reason for this is because the best, most secure way to add to your home equity is to pay down a loan. I understand that a lot of the initial crash had to do with losses of income, but staying current on your mortgage was not enough of a priority for some. Every time you make a payment, you are simply putting that money into a safe place until you are ready to sell your home and take it out, or maybe even open a home equity line of credit and put that money to work for you. By running from your mortgage obligation, not only are you losing out on the potential rebounding of the market and the new equity to be had, as well as other severe consequences, but you are going to wind up paying money to someone else to live, rather than yourself. Also, there are many options available for adjusting a current situation.
For instance, we have been seeing interest rates dropping over the last several months. FHA loans (and other government loan programs) are allowing for refinances if you owe up to 125% of your home's current value. Those who bailed on properties have not been able to reap the benefits of such low rates, while those who stayed in their home have had very favorable refinancing options available to them, freeing up money to be put to work for them in other areas of their lives. Renters and those unable to obtain loans are going to have to wait until later, and there is no telling how the market is going to look in the future.
In conclusion, a long term home is always a safe bet. It has been a difficult season for short term loans and property flipping, but those that have stayed in their homes through the storm will come out on the other side in a better situation than they were originally in. No matter how bad the equity situation gets in a home, with all things being equal, markets show a tendency to rebound. We have been through many a recession in the past, and we have continued to improve after each one, so why is this one any different?
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