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5.4 Million Homes Sport Negative Equity -- Here's What to Do If Your Mortgage Is Underwater

Trends are moving in the right direction, with fewer people underwater.

Good news

Fortunately, things are moving in the right direction, because CoreLogic also found that 1.2 million mortgage holders moved out of the red and into the black on their mortgages in 2014, though their ranks slipped a bit in the fourth quarter. Having about 10% of mortgaged homes underwater is also a great improvement over 2012's 31%.

Sadly, among the millions of mortgaged homes out there, less expensive ones are most likely to be underwater. The relatively low inventory of available affordable homes (in part because builders are focused on higher-value homes and because more families are renting homes) has an upside, though, in that it can boost the value of existing homes for sale -- and, along with those, underwater homes. But it's a gradual process, requiring patience.

What to do

Your most obvious option, should you find yourself underwater on a mortgage, is to just hang on, if you can. Over time, your home is likely to appreciate in value, while the balance you owe on your mortgage will fall and your equity position will grow.

That's not always possible, though. If you're financially strapped and having trouble making your payments, you need a better solution. Refinancing is a good choice, because doing so can lower your mortgage payments. But when your current home is underwater, you may find it hard or impossible to refinance. It may still be possible, though, so look into it. In particular, check out the Making Home Affordable program of the Departments of the Treasury and Housing and Urban Development, which is part of the Obama administration's effort to shore up the U.S. housing market. It features a Home Affordable Modification Program for those who are having trouble making their payments, and a Principal Reduction Alternative for those with underwater mortgages. There's also a Home Affordable Refinance Program.

The Making Home Affordable program might help you if you're underwater. Image: MakingHomeAffordable.gov.

You might think that just walking away from the whole thing is an appealing option, but don't do it. It will damage your credit rating significantly, which will make getting a future mortgage or any other loan more difficult.

Thinking creatively could be helpful, too. If you're in a financial pinch with seemingly few options, think of some seemingly extreme ones and see whether they might make sense for you. For example, to improve your financial condition without selling the house that you can't easily sell, perhaps you could move in with your parents or some other loved one for a year or two, while renting out your home. Alternatively, if your home can command a sizable rental fee, perhaps you could move into an apartment or rented house that costs a lot less, so that you can pocket the difference. (Keep in mind, though, that renting your home out may not be as lucrative as you think, as you'll still have to cover taxes, insurance, maintenance, and repairs.)

Being underwater on your mortgage is no fun, but it's not necessarily a portent of doom.

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The article 5.4 Million Homes Sport Negative Equity -- Here's What to Do If Your Mortgage Is Underwater originally appeared on Fool.com.

Longtime Fool specialistSelena Maranjian,whom you canfollow on Twitter , has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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