Do you know if your mortgage is underwater?
Posted on Oct 29 2010 at 02:36:41 PM in Real Estate
Many people have watched the mortgage crisis unfold, never considering that they are one of the underwater mortgages everyone is talking about. Currently more than 25% of home mortgages are underwater. If you live in California, Nevada, Arizona or Florida and purchased your home between 2003 and 2008, your home mortgage is probably underwater. Your home is the largest asset you will ever purchase. You review your stock statement every month to determine the current value of these assets, why wouldn’t you want to know exactly what your house is worth compared to the mortgage balance? So what does underwater really mean anyway? Underwater means that your current home value is less than your current mortgage balance. You have negative equity. The majority of your monthly mortgage payment is interest. A very small portion is principal, especially during the first 10 years of a 30 year mortgage. So every month rather than this small principal portion paying down your mortgage, the principal payment is just reducing your negative equity. Think about it, if your neighbor purchases the same type of house for $50,000 less than you owe on your mortgage, your neighbors payment will be at least $250 a month less than your payment. For the next 15-30 years you will be paying at least $250 more a month for the same exact house as your neighbor. Is there some reason that you deserve to pay more than your neighbor? The hardest part of determining if your home is underwater is the fact that people don’t realize how low prices have gone. Honestly this is a topic we would all rather not think about. So how do you determine if your home is underwater? Look for homes for sale in your neighborhood. You want to compare homes that are the same size, with the same general features in the same location as your house. Next do some research online. You can use many different online realty sites. The BEST information is not the amount the home is listed for, but the actual price the house was sold for. Homes are being discounted by tens even hundreds of thousands of dollars, in today’s market. Finding a buyer is hard and there is a lot of competition. Prudential Real Estate is one site that provides actual sales information.
Use this formula to determine if your mortgage is underwater:
$ 100,000 Average Sales Price of Homes in your area (example)
X .10 Fees to close sale estimated 10%
= $10,000 Estimated Closing Fees
$ 100,000 Average Sales Price
- $ 10,000 Less Closing Fees
= $ 90,000 House Net Value
$ 90,000 House Net Value - $110,000 Less Current Mortgage Balance =($20,000) Positive or (Negative) Equity
If you have negative equity your home is underwater. If your negative equity is more than 10% of the value of your home you should seriously determine if walking away may be the proper financial decision for your families future financial health.