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It’s no secret that the housing market is booming and home values are currently skyrocketing throughout the United States.

Have you ever wondered, though, what would happen if your home value was to decrease? Can you make a profit if you have an upside-down or underwater mortgage?

Read on to learn more about the effect of a decrease in home value. You’ll also find some tips on how to handle this situation if you happen to find yourself in it.

What Happens When Your Home Value Decreases?

A decrease in your home’s value is problematic, but it’s especially problematic when the value drops below the amount still owed on your mortgage loan. When this happens, you’re in a situation known as an upside-down mortgage or underwater mortgage.

Still confused? Here’s an example that might make things clearer.

Let’s say you bought a house three years ago and paid $300,000 for it. Depending on the shape of the housing market, 3 years later, your house could be worthless. If you were to sell it, you might only be able to get $220,000 for it.

To make matters worse, you probably haven’t paid enough off on your mortgage to make up the difference. If you still owe $280,000 on your mortgage, for example, have negative equity and an upside-down mortgage.   

What Causes an Upside-Down Mortgage?

Fluctuations in the housing market often contribute to people finding themselves in underwater mortgages. Property values can decrease in your area for a variety of reasons, including the following:

  • High foreclosure rate
  • Proximity to undesirable businesses (cemeteries, power plants, etc.)
  • Natural disasters (e.g., floods affect the surrounding environment)

You may also end up in an underwater mortgage because you’ve missed payments on your house. When you miss multiple payments, you’ll naturally owe more money on your property, especially when you add interest rates and other fees into the mix. If this goes on for too long, it can put you in an undesirable position when you’re thinking about selling. 

How to Handle a Decrease in Home Value

Being in an upside-down mortgage certainly isn’t ideal. Fortunately, there are some positive steps you can take to rectify the situation, including these:

Stay and Pay

If you have the option to stay in your home and continue making mortgage payments, this is often the best choice.

In the short term, your home’s property value may have dropped. If you can wait it out for a few years, though, you may be able to overcome this temporary challenge and still come out on top. 

Think about the current housing market. In the last couple of years, it’s boomed dramatically, and a lot of people’s homes are now worth far more than what they originally paid for them.

Some of these people may have even been upside down on their mortgages not too long ago. Because they waited it out, though, they’re now in a much better position.

Modify Your Loan

In some cases, you might be able to modify your home loan. Reach out to your bank and find out if they’re willing to lower your monthly mortgage payments in exchange for extending your loan term.

If you’re underwater because you’re behind on payments, this can be a good option. It will allow you to stay in your home, but it will also mean paying more money in the long run.

Consider a Short Sale

If you want to get out of your house but owe more than it’s worth, a short sale may be your best bet. Short sales will eliminate your mortgage debt and free you up from your obligations to the bank.

In this situation, the bank allows you to sell your home for its fair market value, even though it’s lower than your loan balance. This is typically less expensive for the bank than a foreclosure, so they may be willing to go through with it.

If you work with an experienced agent, you may even walk away with cash from the sale still.

Declare Bankruptcy

Another option is to declare bankruptcy. Filing for bankruptcy allows you to erase certain debts and/or enter into a multi-year payment plan supervised by the court.

If you file Chapter 7 bankruptcy, you will likely lose your home in the process. With Chapter 13 bankruptcy, though, your mortgage often gets included in your payment plan.

How to Avoid an Upside-Down Mortgage

You may not have experienced a decrease in your home’s value. However, after reading about the impact of such a decrease and what’s required to overcome it, you’re probably eager to know what you can do to avoid getting into this situation in the first place.

Sometimes, upside-down mortgages are unavoidable. Millions of people were affected by the 2008 real estate crash through no fault of their own, for example.

However, you can still take some steps to reduce your chances of dealing with this issue.

If you’re currently shopping for a home, make sure you choose a property that you can truly afford. If you stretch yourself too thin with an exorbitant mortgage, you’ll have a harder time making payments, especially if you lose your job or you run into another financial challenge.

Look for homes in areas that have experienced consistent property value increases, too. Do your research before buying so you can avoid buying a home in a volatile location. 

Need More Real Estate Advice?

You now know a lot more about the housing market and what you can do if you’re experiencing a decrease in your home’s value. Do you still have questions about homeownership or selling your house, though?

If so, we have lots of other resources available on our site. Check out some of our real estate blogs today so you can continue learning and preparing for the future.

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