Please educate me:
Why is it such a big disaster to be ‘underwater’ on a mortgage…that is, having your house be worth less than the balance owed on it?
I understand that it would be a bad thing if you need to sell if you need to relocate, and it’s not good if you consider a house to be an investment, but if you bought it as a place to live you still have it for that purpose, at the price agreed upon.
Not to mention that markets change and it may someday be worth more.
No, but if the house is now valued at 30% less than it was when you bought it, you’re going to be paying mortgage payments for years before you reach the break-even point.
This means you won’t be able to leverage equity in your home to secure other lines of credit or loans.
It’s not a terrible situation if you can still afford your payments I suppose.
It also isn’t such a bad thing if the amount by which the property is decreasing in value plus your mortgage payment is less than the rent you would otherwise pay - essentially you are still losing money, but you’re losing less money.
The big deal for the individual at this time is that if you are underwater, you can’t refinance the loan. Since rates are very low at this time, this is a big loss for the homeowner.
[This is one of the things Obama is trying to change.]
On a broader scale, the more people who are underwater on their loans, the more people who are likely to foreclose or short sell, which depresses the price of housing generally.