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What steps should be taken, if any, when you find out your home's market value is underwater, i.e. worth less than the mortgage owed?

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    The way this question has been phrased -- like a poll -- makes it inappropriate for the site. Perhaps rewording it can make it a better question. Is there a problem or concern you are trying to address? – Chris W. Rea Sep 7 '11 at 2:02
  • Hi, actually I do not want to do a poll. Just want to see what steps people are taken when they found they house is underwater like talking with a bank (Usually bank does not like to talk to homeowner until they miss to pay their mortgage, I guess). So I can see what I didn't have done. – Richard Sayakanit Sep 7 '11 at 2:22
  • OK, thanks. I've modified and re-opened your question -- it's no longer a poll and better addresses the issue in your comment. – Chris W. Rea Sep 7 '11 at 11:54
  • I don't have any experience to give advice, but I've heard of such thing called a short sale, where you can sell your house for it's market value (less than owed) and the bank will accept that as your outstanding debt. en.wikipedia.org/wiki/Short_sale_%28real_estate%29 – user606723 Sep 8 '11 at 17:06
  • Economically speaking, the reason your house is yours, is because its worth to you is/was higher than its market value. You should get worried when your mortgage exceeds the worth to you. – MSalters Sep 9 '11 at 12:34
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Do you still enjoy living in your home? Can you afford the mortgage payments? Is there a reason for you to move, such as a relocation for work, or your third kid is on the way and your current house is already crowded with two?

Those questions are more important than "Is my home worth more than what I owe on it". Ultimately, it's your home. You probably chose it for more than just its price, and those qualities should still make it valuable to you in some way beyond the monetary value which goes up and down with the market.

You have a few options:

  • Walk away. This would make sense if you don't want to live there anyway, or if you really can't afford it (lost your job, etc.) You will destroy your credit rating by taking this route.
  • Talk with your bank. If you can afford your payments and everything, they aren't likely to give you anything, but if you have a good relationship with them, maybe they will. It's worth a try.
  • Stay in your home long enough that your head is above water again. You're paying down your mortgage, and home values track inflation over the long term. Eventually those curves will cross. This may be ten years out, but if you enjoy living there and it's still the "right home for you", why not stay?
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That's easy, keep making the payments and go on with life. The number that matters more than loan/market value is loan/equity. As long as you can sell it for enough to pay the balance on your loan you should be okay. Not saying it doesn't suck, but financially you are fine.

If you owe more than the house is worth, I'd suggest paying it down as quickly as possible to fix that ratio to reduce your financial risk in case you lose your source of income.

Personally, I think it is pretty slimy for people to walk away from house notes or try to short sell them when they can afford to continue payments just because the market value of the house fell. How would you feel if, when house prices were skyrocketing, the bank canceled your loan and repossessed your house because they could resell it for more money? (not that they could realistically, just speaking hypothetically.)

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    "If you owe more than the house is worth, I'd suggest paying it down as quickly as possible" - I'd suggest the opposite. Since the house is not an ATM, I'd recommend saving as much on the side as he can. If he loses his job, he should be able to pay the mortgage and bridge the gap to the next job. By paying faster he ties up the very money he might need to survive till that new job. (Note - I did not suggest walking away, just stick to the regular amortization as he's now 20% away from a normal refinance.) – JoeTaxpayer Sep 8 '11 at 0:32
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I will echo the others; your home should be worth more to you than its market value. It is YOUR HOME. It's where you come home every day to your wife and kids, where you build a life. Yes it's an investment, but it's not like a stock or bond that you hold for a little while and then cash out for the profit.

The one time you should be worried about being "upside-down" on your mortgage is if you're getting out. If you're moving to a new job at a new company in a new city, you have to make good on the remaining loan balance, and that won't all be from the sale of the house. Unless you're at that point however, if you can afford making the payments and have no reason to move or to cash in equity (of which you have none), then just keep making the payments. Hey, it's better than rent; you'll never see rent money again, while even if you're underwater, you're making headway with each payment.

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  1. Step back and take a deep breath.

  2. Pay your mortgage.

  3. repeat 1 and 2 monthly until equity > mortgage.

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