Underwater mortgages -- loans on which the amount owed exceeds
the property's value -- have posed a serious hardship for many
homeowners in recent years. Fortunately, conditions are right for
more and more of these loans to emerge from their underwater
In many cases, being underwater shouldn't be a big problem for a
homeowner. Real estate should be viewed as a very long-term
investment, and what matters in the short term is how affordable
your mortgage is. However, an underwater mortgage can cause
problems under the following circumstances:
- When home owners need to sell the property.
- When home owners can't afford their mortgage payments, either
because of a financial setback or because they over-reached on
their original loan.
- When home owners were looking to "flip" a house for a quick
But luckily for people in these circumstances, signs have
appeared lately that more underwater borrowers may soon get a
Underwater mortgages finally get some relief
report from CoreLogic
indicated last month that the number of underwater mortgages
recently declined to its lowest level in three years. What is even
better news is that conditions look right for more mortgages to
emerge from underwater status soon.
Here are three things that may throw a lifeline to underwater
Rising home prices.
The S&P/Case-Shiller Home Price Index has now risen for five
straight months. The gains are modest -- nothing that would be
confused with the real estate boom of the previous decade -- but
even slow progress will steadily help bring the value of homes
above the remaining mortgage debt.
Time and amortization.
As noted above, rising home prices are helping mortgages emerge
from underwater, but even if home prices just broke even, time
and amortization would help the problem. After all, most
mortgages are designed to reduce debt month after month, with the
amount of debt reduction accelerating as the mortgage ages. So,
as long as home prices don't start falling again, in this case
time really does heal.
Low interest rates.
It's a fundamental bit of mortgage math -- a
lower interest rate on a mortgage
pays down principal more quickly in the earlier years of the
loan. With current mortgage rates below 4 percent, today's
mortgages build equity more quickly than they have historically.
While the rub is that many home owners haven't been able to take
advantage of current mortgage rates because their loans are
underwater, now there are more
that allow some borrowers to do just that. Lowering their
interest rates should help these borrowers get their loans out
from underwater more quickly.
Although you wouldn't know it from some of the national media
coverage, a wide majority of mortgages are above water, and of
those that aren't, there were nearly 2 million that were only 5
percent underwater at the end of the first quarter of 2012,
according to the CoreLogic report. Current conditions suggest many
of those mortgages should be emerging from underwater soon, even
without a major rally in real estate prices.