What To Do With An Upside Down Mortgage

Just to be clear, being 'upside down' or 'underwater' on your mortgage simply means that your asset (your house) is worth less than the amount of money you owe on it. For Example, you may owe $250,000 on your house that was worth $275,000 several years ago when you purchased it. However, in today's market your house is only worth $210,000. If you wanted to 'sell' your house, you would literally need to pay $40,000 to the bank to get out of your home with your credit unscathed.

With so many people in this situation coming to the realization that it will take years and years to just break even on their existing home, many are simply choosing to walk away. Taking this action will damage the homeowners' credit for 7 years, making it difficult and/or extremely expensive to make any significant purchases, such as a car or another home, down the road.

The impact is not only on the individual, either. With more homes going into foreclosure, the values of the surrounding homes drop even more. As you can see, this becomes a negative cycle that just feeds on itself and gets worse and worse. There are a few alternatives that one could consider before walking away.

Stay in the house. If you can manage the payments and you don't need to move, don't let the 'paper loss' of home value freak you out. You're going to need a place to love anyway, and with the cost of rent combined with the damage to your credit, will you really be saving much money by walking away from it?

Sell the house short. You can try to negotiate a short sale in which you sell the house for the going market price and the bank agrees to take a write off on the unpaid balance. In the example above you would sell the house for $210,000, leave with $0 equity yourself, and the bank absorbs the loss. The problem with this is that it will damage your credit almost as much as a foreclosure, so consider this option carefully before utilizing it.

Rent the home. If you are forced to get out of the house because of a job relocation for example, you may want to consider finding a tenant to rent it from you. The problem here is that it may be unlikely that you'll be able to get enough rent to cover the full mortgage, so you'll be operating at a negative cash flow. If you can swing it though, it is an option.

Refinancing with the Obama Home Affordable plan. If you're not too far underwater you may be eligible for one of the new plans brought forth by President Obama in which you can borrow up to 105% of the value of the home to get in at today's low interest rates. You can find more information at MakingHomeAffordable.gov.

Obviously none of these situations is idea. Unfortunately, short of winning the lottery, you have to face facts and try to do the best that you can.