Underwater mortgage defined

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What is an underwater mortgage?

An underwater mortgage is a home purchase to lend with a capital greater than the market value of the house. This situation can occur when property values ​​drop. In an underwater mortgage, the owner may not have equity available for credit. An underwater mortgage can potentially prevent a borrower from refinancing or selling the home unless they have the cash to pay the loss out of pocket.

Explain submarine loans

Cancel an underwater mortgage

Underwater mortgages were a common problem among homeowners at the height of the 2008 financial crisis, which among other things led to substantial house price deflation. While the market has recovered strongly thanks to the support of monetary policy and interest rate stabilization, underwater mortgages remain a factor that homeowners should closely monitor when investing in real estate.

Generally, a mortgage is considered underwater when the value of the home is less than the original value. mortgage main. Depending on how much the home’s value has decreased since its purchase, the borrower may also have no equity or negative equity. The equity in a home is associated with the value of the home in relation to the balance paid. A borrower with a mortgage of $ 250,000 who sees the value of his house decrease to $ 225,000 is considered to have an underwater mortgage. If the borrower has paid off half of the principal of his mortgage, resulting in a principal balance of $ 125,000, he is still considered to have a positive equity of $ 100,000 which could be used in an equity loan. domiciliary.

The 2008 financial crisis

The 2008 financial crisis had many effects on the US economy. One of those effects was a burst real estate bubble which has significantly deflated the values ​​of real estate properties in the market. One of the main catalysts for the deflation of home values ​​has been the flexibility of lending standards for borrowers, allowing for broader mortgage approvals. These loose loans specifically to subprime borrowers have led to an increased number of defaults and foreclosures that have affected the value of real estate in the US market. This led to various unusual situations causing losses to borrowers across the market whose mortgage value exceeded the fair market value of their home.

Subsequently, the implementation of the Federal Reserve’s monetary policy helped the US economy to recover and house prices to rebound. The fall in interest rates following the crisis has also helped reduce the burden of mortgage payments and increase some demand for real estate.

Assessing the value of a house

Given the new market initiatives stemming from the Dodd-Frank legislation helping to improve mortgage lending standards, homebuyers are unlikely to see the substantial declines in house prices that occurred in 2008 again in 2008. However, the 2008 financial crisis brought about a new sense of the market. achievement and prudence in real estate investment. As such, lenders are now more cautious about the mortgages they approve and homeowners are generally more cautious about the mortgage debt they incur. Even with new insights into the market, homeowners still need to closely monitor home values ​​and mitigate underwater mortgage risks.

To maintain a good understanding of a home’s value, a homeowner may choose to have the property appraised annually. Expertises are also carried out regularly to calculate property taxes. An appraisal value will be based on a number of factors which may include national market trends, recent sales of similar properties in the area and neighborhood as well as the individual amenities of the home. Homeowners can also strive to maintain a high value in their home by performing regular renovations and actively supporting positive community activities.

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