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?
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?
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.)
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.
Step back and take a deep breath.
Pay your mortgage.
repeat 1 and 2 monthly until equity > mortgage.