Financial Strategies for Underwater Mortgages: A Guide for Lower-Income Americans
Owning a home is part and parcel of the American Dream. However, when the housing market fell, many found themselves owing more on their mortgage than their home was worth. This precarious situation, known as an "underwater mortgage," can be particularly daunting for lower-income Americans. However, being underwater doesn't necessarily mean you're sunk. Below are financial strategies you can deploy to navigate this tough territory confidently.
Understanding an Underwater Mortgage
An underwater mortgage occurs when your home's value is less than what you owe on your mortgage. This can happen due to falling property values, high-interest rates, or an inflated housing market. While this situation can feel hopeless, there are strategies available to turn the tide.
1. Keep Making Payments
Although overwhelming, one of the best strategies with an underwater mortgage is to keep making payments on time if you can afford it. This will ensure you don’t fall further behind, and over time you may reduce your owed balance and, hopefully, home prices may improve.
2. Mortgage Modification
If payments are too high, contact your bank or lender about mortgage modification. In this case, your lender could agree to modify your loan terms such as reducing the interest rate or extending the loan term to lower your monthly payment. This could help you afford your payments and stay in your home, thus avoiding foreclosure.
3. Refinancing
Another option to consider is refinancing your mortgage through the Home Affordable Refinance Program (HARP). HARP is designed for homeowners who owe more than their home is worth but are up-to-date on their mortgage payments. If you qualify, refinancing could lower your interest rates, reduce your monthly payments, or shorten your loan term.
4. Short Sale or Deed in Lieu
If staying in your home is not possible, a short sale or a deed in lieu of foreclosure could be your best option. A short sale is when your lender allows you to sell your home for less than you owe on your mortgage. Meanwhile, in a deed-in-lieu of foreclosure, you voluntarily hand over ownership to the lender to avoid the foreclosure process.
Both options will still negatively affect your credit but less so than a foreclosure. It’s important to note you may owe taxes on the forgiven debt unless you qualify for an exemption.
5. The Principal Reduction Alternative (PRA)
The PRA is another program from the Making Home Affordable (MHA) initiative. If your mortgage servicer participates in this program, they might reduce the principal amount you owe on your home, thus making your payments more affordable and aligning closer to the current value of the home.
Negotiate With Your Lender
Remember, it’s in your lender’s best interest for you to keep making payments. Therefore, they might be open to discussions on changing your loan terms. Be proactive, honest about your situation, and open to negotiation.
Seek Legal Advice
A legal expert can guide you through your options and their respective consequences. Some organizations provide free or affordable legal aid if you qualify. They can help negotiate with the lender, or even take legal action if necessary - such as in cases where predatory lending practices were used.
Bottom Line
An underwater mortgage can be a stressful experience. But remember, you have options and resources available to navigate this challenge. Whether it's continuing payments, refinancing, negotiating with your lender, or seeking help from legal experts or government programs, there are myriad ways to regain your financial footing. Always weigh the pros and cons of each option and choose the one best suited to your current situation and future financial goals. Dealing with an underwater mortgage is tricky, but with resilience and smart decision-making, you can stay afloat.
