If you are in the position where your home is now “underwater” (i.e., it is now worth much less than the outstanding amount owed on the property), then it can be difficult to decide which course of action to take. A recent study detailed the available options for underwater homeowners and also advised on when it is time to walk away from your home.
The first option for homeowners in this situation is to stay and pay. There are many reasons why an individual may choose to continue to pay the mortgage even although it may take decades before the property is worth more than what is currently owed once more.
Sometimes it is a simple matter of pride, other times there is an emotional or sentimental attachment to a family home. Bankruptcy attorney Cathy Moran says,
I am spending a lot of energy talking people out of homes on which they are spending too much money and have no hope of having any equity in for at least a decade. We have instilled unrealistic emotional value in a home. The home is now on the same level as the flag and motherhood. But it’s just housing!
A second option is to seek refinancing on the property, however this is not always easy to do. There should be no risk to your credit rating as you are simply using one loan to eliminate another.
However, just like those who stay and pay, refinancers could end up throwing money away and the property remains at risk if you fail to keep up with the payments. There is also the option to modify the home loan which involves lowering the interest rate or payments for an extended period of time to allow the borrower to catch up on payments. Missed payments are tacked on at the end so homeowners will take even longer to repay the money owed on their home.
The fourth of all available options for underwater homeowners is a short sale. CoreLogic recently reported that short sales almost tripled last year. The goal in a short sale is to have the lender approve a sale for less than what is owed and agree to wipe out the remainder of the debt rather than foreclosing on the property.
One in every 605 homes received a foreclosure notice in May 2011 according to the study. Many homeowners struggle until the end to save their home, but just as many will simply choose to walk away. However this is not as simple as it sounds and it is much more than simply packing up and moving out! Walking away is usually only considered when all other options have been exhausted by the homeowner.
If none of the above options for underwater property is suitable, then the study leaves bankruptcy as the final option. However, while this may get your head above water it is important to note that it will not automatically deposit you on dry land!