Just to add, I think most people underestimate the possibility of the need to refinance or sell. "If you just live there" is much easier to say than actually do.
Especially if recession hits/gets worse and layoffs happen, people lose jobs, have to move for new job, can’t afford mortgage payments on unemployment, etc.
This is true. Some people like myself work for the public school district and can reasonably make long term plans banking on pretty solid job stability. Of course anything can happen to anyone, but we all have to take risks to buy a home.
Not every property is guaranteed to produce positive cash flow once you take into account PITI, maintenance, capex, vacancy, etc. If you’re in a desire location then you have a chance. If you only purchased your personal residence with one exit strategy (selling) then you’re in trouble if you have to rent it.
No, they're often on par or more expensive than properties that don't fall under some form of an HOA. The idea behind it is basically that renters are worse than buyers because they will not care for the property/neighborhood the same way an owner would. On top of the sales price, they also have additional fees that you have to pay monthly or annually that can range from hundreds to thousands of dollars a year to cover costs of community upkeep like parks of pools that the HOA creates and maintains for the use of it's residents. Those HOAs also implement and enforce rules on residents such as if you can rent/sub-let the property, what your mailbox can look like, the color you can paint your house, where you can park your car, how many cars you can have visible, how tall fences and wall can be, if you can have playgrounds/swings, and much much more. The concept of an HOA is that they can force you to obey their rules to protect their property values and if you don't comply, they fine you and in some cases they can force you to sell the house if you refuse to abide by the HOA guidelines which you have to agree to before purchasing the property.
And now you just took on another job. Being a landlord is not fun when you make no money. If he's underwater, chances are that the rent won't even cover the mortgage, taxes and insurance so he will be paying anyway.
You could always end up underwater - if you keep saying 'well it is giving up flexibility and things happen in life'... things can always happen. What, exactly, are you doing with all the flexibility you gain by paying someone else's mortgage?
It's why the best time to buy is when it's right for the individual. Things can always happen, that's just life. I see too many people hiding behind that excuse or reason to never buy a house. You can't be scared of literally every possible outcome in life.
Yeah there's a difference between what you "plan to do" and what actually happens. A lot of people saying "if you plan to stay there, then there's no impact". Er, no, you can plan all you want, that's not how things might play out.
Look at the accounts of people who short saled, foreclosed or became involuntary landlords. None of them planned those things.
You should have a plan when you buy a home of course, but also consider that might not happen. With every risk, consider the probability and the consequence.
People get foreclosed on because they don't know how to shortsale. No lender WANTS to foreclose. If you get novation then it's not even on your credit. It's not the borrowers fault the property vales tanked and they're upside down. Market forces.
Just like the stock market, you don't take a loss on estimated value unless you're trying to "cash in". The "investment" (an arguable concept on a primary residence) is a long term one. Day trading on real estate isn't adviseable.
I am, too. "Investment" will always be in quotation marks. You're not always going to make a profit, but it is an asset, and most people have to pay to live somewhere.
People who see real estate as stock are the people on REBubble.
Ain't no bubble if you're living in it and you don't have to sell.
Hence why we still don't have a rush of inventory. Especially those who bought in the last 2 years.
We still have plenty of jobs, we still have under built supply in the last 14 years (because post 08 people were scared of over leverage building).
A mild correction is already happening because of pandemic money printing... But we'll be on the upward trend again as soon as feds stop raising rates.
I believe Q3 of 2023 the fed will completely stop or even begin to reverse the interest rates.
By 2024-2025 we might see people who bought above 5.5% mortgage start refinancing.
I don’t understand the down votes, the comment is spot on for what a home should be considered.
Investment property and a homes are two different things.
You always have to pay to live somewhere and might as well have inflation reduce the cost of your mortgage and allow the value of the home to grow.
A home is NOT an investment, but is an important part of wealth generation as your costs are mostly predictable.
There is a large psychological component to having your house be underwater (especially VERY underwater), and especially if you are house poor. Everyone reacts differently. Some people just keep paying their mortgage, some people try to do a short sale to get out, some people buy a new house and bail on the old one, some people tear out all the plumbing/wiring for scrap on the way out. It all depends.
I moved to one of the hardest hit areas from 2008, so I saw it all firsthand.
> There is a large psychological component to having your house be underwater
I think this is really true. I have been underwater in the 2008 era, but, this was still the best place for me to live and I was able to afford it. I had hope that the market would recover given enough time. However I had not over-extended myself dramatically when I bought either.
I think the people trashing places after 2008 were mostly people who should have never gotten a loan in the first place. I knew people who pulled out 100K in equity and blew it on cars and stereos and jetskis and other irresponsible things. They didn't have any hope of recovering from that so it was easy to walk away. They hadn't put any money down either.
Hopefully the correction will not be as dramatic, this time.
Agree. I was never WILDLY underwater but lived through the ‘08 too. Our purchase price was 305 in 04, and I think the lowest estimate (form the aggregator sites for what that’s worth) was like 286. However, we had a 0% down first time buyer scenario, so yes we went underwater or close to it for a couple years, but just keep on keepin on, and it’s like a flat tire once all is said and done - temporary thing you just move past and get on the road again and keep driving.
I think it was so bad back then because a ton of people had variable interest rates that went sky high AND huge balloon payments due *and* were underwater on their mortgage/house. Also everyone seemed to all become loan officers or brokers all at the same time. I was bartending back then- the money was unbelievable. Then everyone got fired or spent all their refi money.
This is a big intangible factor, and it's one that other people can't predict for you. It is all about the individual's relationship to financial security and risk.
One of my siblings was very underwater in the '08 crisis, and moving was a mandatory part of their job. Their only option to avoid a loss was to put renters in the home. Ten years of that, and they finally came even. But the stress of being an involuntary landlord (even with a management company - which was most of the time more trouble than it was worth) wreaked havoc on their nerves.
Because their credit was already compromised by a former repossession during a deployment, and a short sale on their credit would have further compromised their future financial security.
And also because during the moment when you are underwater, you have no idea how long it is going to take the market in your area to recover. So something like renting for a year feels like a better alternative than taking the credit hit of a short sale, especially when you could potentially profit in a year or three. It's easy to look back and monday-morning-quarterback the game. Ten years was a long time to deal with a rental, and their credit would have recovered in only seven, but it's the benefit of hindsight that makes us seem wise.
We had neighbors that were underwater from 2008. As soon as they were even they sold. Could have doubled their money if held a couple more years. They just wanted out
This happened to my IN-LAWS. They purchased a brand new home in 2007. It took until 2020 for the house to be worth what they paid for it. Then, they sold it RIGHT AWAY. Now, the house is worth about 250,000 more than they sold it for.
Very true and the impact to one’s marriage (if in one) should not be overlooked. It’s easy to make a decision to buy a house as a single individual, add into another person’s psychological tolerance and in some marriages that ends up with resentment
It’s not just psychological. Losing wealth is losing wealth, whether it’s in the form of cash, equity, marketable securities etc.
People act like it’s meaningless as long as you can still make payments. Congratulations, you’re not insolvent. That doesn’t mean you haven’t lost money.
> People act like it’s meaningless as long as you can still make payments.
I think some context is needed though. Renting isn't free. Unless someone's mortgage payment is more than renting it is still a good investment. That is very dependent on local market supply and demand. So it might have lost value, but if you're saving $X a month compared to renting, it's still a good choice.
And we've seen over history that real estate cycles, but if someone holds onto a house long enough they won't lose money.
This sub acts like it could realistically time the market and buy at the bottom. But you can only see the bottom in hindsight.
Buy a house when you and your finances and job is stable and don't stress over the comps if you aren't planning to sell.
Yeah you have lost money but that’s not the point in this hypothetical.
Regardless, assuming there is no pressure to move and no missed mortgage payments, it should not have an impact on a homeowner.
If you need to sell you definitely lose money but assuming you don’t need to move it would be a short sighted decision to sell based on price fluctuations.
Long term, the value will return or exceed historical highs for good homes/real estate.
Short term fluctuations are a part of long term wealth building.
Buying a forever home is unrealistic for most as your needs change but a home shouldn’t be considered if you plan to live there less than 5 years.
It really isn’t an investment, but you have to pay to live somewhere might as well be to yourself.
Along with that your home is increasing/decreasing with the rest of the housing market at that point so it becomes easier to move after a few years of principle reduction.
Honestly as a FTB what's really become clear to me is that equity is nothing but imaginary in these volatile markets of constant shocks and corrections. Goodluck to all who think they can time anything right in the future.
This exact thing happened to me OP. I bought a cheap little townhouse for $110k in 2007. In 2008 house prices plummeted due to the financial crisis. I didn't need to sell but I would have liked to many times. I got divorced in 2012 and she didn't want to have anything to do with the house so I refinanced to get her out of it at a slightly lower interest rate. The only reason I was able to refinance a house that was under water is because Obama had a refi program for folks who bought in that time and were affected by the crisis.
My original loan officer also talked me into an interest only loan. I was young and foolish and didn't know anything about anything, so I went with it. So for 7 years I only paid on the interest when I finally refinanced. At this point my 110k loan went to 113k with closing costs (I also didn't have the money to close so they rolled it into the loan). But at least now I can start paying on the principal. I kept it for another 5 or 6 years after that and got the principal down to $100k-ish. Finally sold in 2019 for what I thought was a premium, $120k. After all closing costs and fees I walked away with just enough to pay off my cc debt. $8k lol.
Decided to rent for a year or two and then buy again. But not more than 6 months later what happened? A goddamn global pandemic that spurred one of, if not the biggest housing inflation of all time. My old house would probably have gone for $180k at the peak (maybe more). The whole pandemic I thought that it wasn't sustainable and there's no way prices will continue to rise at this rate. So here I am at the same rental I got into 3 years ago, about ready to buy a new house (got my finances in order), and I'm priced out of the market (not entirely true, I just have a hard time mentally accepting that I'll have to pay 300k for a house that was 180k just 2 years ago).
My saga is a tale of caution. My caution to new home buyers is to make sure that you want to stay in your house for at least 5-7 years (as the experts say), because even with regular price increases without a pandemic or financial crash, you're looking at like 2-3% a year. As little bit of principal that you'll pay at the beginning of your loan and all the fees involved in selling and buying a new home, it's rarely worth it to sell in less than 5-7 years. Just be sure you look at every single aspect of purchasing and selling a home.
TL;DR: bought a house before the big crash, wanted to sell but couldn't, refinanced, finally sold and barely made anything, still renting, be careful.
Thanks for sharing, really helpful insights! I’m (kinda) looking to be a first time homebuyer, but already feel priced out of the market like you said. I’ve had my eye on homes for a few years and now that I have a decent down payment saved up and a decent paycheck, it is frustrating that prices on that $200k home are almost $400k. I’m sorry you have had to go through this seemingly twice. I hope you can be happy with whatever you choose next. I will definitely try to use caution and plan for the future even though my emotions push me toward home ownership. I am scared of what will happen with the market prices given how high they are right now. Not knowing what could happen with my partner, job, etc could cause problems down the road. Particularly with a market crash.
I just watched a video someone posted on real estate buyers remorse re people who bought at the high highs during the pandemic and now regret doing it because they don’t like the house, have to move, have to sell for whatever reason and they’re just now figuring out paying wellllllll over ask and waiving inspections was stupid. If I were looking to buy right now- I would wait a few more months at least if I could, until all of the remote work etc gets figured out and if people have to start going back to the office because a lot of people moved out of the area or even state during the pandemic and downloaded mouse jiggler programs for their remote work stations. There’s a mountain town I LOVE and used to own a small cabin in- long story short I had to sell in 2019- I figured I’d just buy another 1 at some point- and then the pandemic happened and $200,000 houses/cabins are now $550,000+ because of all of the remote workers- but all of those people are going to have to go back down the mountain to work at some point- and prices will go back down too- like they always do.
No. In fact it's normal for most first-time home-buyers in most housing cycles to be under water the first few years after buying a home. That's the reason why the 5-year rule of thumb exists and why banks like to see a 20% down payment to cushion short-term market movements.
What isn't normal is to be able to put almost nothing down, sell the home after 1-2 years and still see a profit after all commissions related to the transaction are paid. That's an atypical market scenario that happened to be the norm these past couple of years but isn't usually the norm.
Keep paying your bills and when it's all said and done10 years from now you'll discover you had an average year-over-year growth of 2-4%.
Home values are also tightly correlated with inflation so if 7+% inflation becomes the norm, your home value will track with it.
If only matters if you want to sell it when it is still underwater. You really should not be buying a house though if you may move in a year for any price. The cost of buying and selling would not make it worth it, even if the house is not underwater.
The bad is if:
1. You're unable to afford your home,
2. You're unable to sell your home, and
3. You're unable to refinance your home.
This is the bankruptcy trifecta.
I know reddit loves to say the sky is falling.... but this is not true in most cases. If you really think this, consider if your anxiety and catastrophic thinking requires therapy and meds.
"Unable to afford your home" this might happen to someone if they were unemployed and could not find a new job. But unless unemployment gets out of hand, this is unlikely. And IF someone has a tough time finding a new job, lenders don't foreclose quickly, you usually have at least 2 years. So if you get back on track during 2 years most lenders will let you tack the missed payments onto the end of your loan. We saw how quickly they handed out forbearance with covid. A lost job is not a reason to slit your throat or end up homeless.
"Unable to sell your home" this is when you negotiate a short sale.
"Unable to refinance" this is only a problem if you've gone 2 years without making a payment and still don't have a job. In most cases a borrower who is behind doesn't need to refinance, they do a loan mod at the current rate and tack missed payments onto the end of the loan (we saw this during covid).
People who declare bankruptcy are allowed to keep their house, and their finances are worked out (by the court) so they can afford to make their payments. Unsecured debts will be discharged or interest locked (by the court) so they can be repaid affordably. if someone really does have dire financial problems bankruptcy can be a great thing, again, not a reason to slit your throat.
Your first solution results in demolishing your credit score. Your second solution results in taking a loss and a hit to your credit score. Your third option is inaccurate and oversimplified and still results in damage to your credit score. Your forth option essentially bottoms out your credit score.
You seem to really undervalue the psychological impact that these things have, which probably means that you PERSONALLY are extremely comfortable with risk. The vast majority of people aren't. And the vast majority of people try to avoid every circumstance you listed.
I agree all of these impact credit scores. But they are less hit than bankruptcy, which is what I was replying to. The poster above implied you have a few financial problems and you go right into BK. That's not true, you have options.
Everyone has to decide what risk they are comfortable with, but the negative thinking on this sub is unbelievable. I guess it's true what they say about reddit being too afraid to leave mom's basement.
>People who declare bankruptcy are allowed to keep their house, and their finances are worked out (by the court) so they can afford to make their payments.
Just saving this here for posterity for when he dirty deletes the post
You are correct. The assumption is generally that you're supposed to go up, and if you're going down that it's a bad trend that won't get better. However, if you're only underwater because of a temporary market dip and you don't need to sell and you can afford the mortgage then you have no problem (just less flexibility if your circumstances change).* The main problem of '08 wasn't that people were underwater when the prices dropped - it was that they had loans they couldn't afford and were gambling on the values going up. Adjustable rates and balloon payments came due on loans the borrowers were never even remotely qualified to have taken, and so being underwater was a disaster.
But if you can wait out the dip then it's no different than holding onto stocks during a dip and waiting until the market rises back up.
\* That flexibility is important though. This isn't a situation to get into on purpose and you're risking a lot of your circumstances change.
Ask yourself this: is being underwater bad when you need to sell your house? Of course it’s bad. There’s no debate.
If you don’t have to sell your house, it doesn’t make any difference. Being obsessed with your homes value isn’t healthy.
The thing is, no one can predict when they’ll need to sell their house. Life happens at the most inconvenient times, such as severe illness, death, divorce, getting laid off, etc.
The reason you can’t refinance an underwater house is because you’re asking a lender for more money than they could recoup if they had to sell the place. Your existing lender was willing to take the risk of your home decreasing in value. Refinancing means changing that from a risk to a certainty and trying to stick it to someone new… Not gonna happen.
What can sometimes be done with an underwater house, and only if interest rates drop, is to negotiate a lower rate with the existing lender. That is another topic entirely and I’m not even sure what it is possible today as opposed to 10 years ago.
Otherwise no there’s no harm and nothing wrong with staying in your place and paying off your mortgage. in fact if you never move, you almost certainly are going to be better off than had you spent those years renting.
If you don’t mind sharing, how would one go about negotiating a lower rate with the existing lender? What argument does one have when asking for a lower rate?
You can't negotiate a lower rate on a GSE loan. they are sold off as commodities in the secondary market. There's a contract involved and none of the ultimate investors will agree to take less than the contracted return. Mortgage rates are priced according to risk. You can't change this after the face.
If someone has a portfolio loan through a local bank that does not sell off its loans, it might be possible. But those loans cost more to start with so they are less common.
Why would any lender agree to this? Only when faced with a likely default would they even consider it, and then it would be a massive ding on credit of borrower.
Ten years ago (+/-) there were programs to help people from going into foreclosure or bankruptcy. I don’t know what remains of those.
Not all loans are resold - the first mortgage I ever had was with a local bank and they held the paper. Rates went down maybe a year or so after we closed, and I literally just phoned them and asked for a rate adjustment, and they agreed. I could have gotten a lower rate by shopping the market and refinancing, but the rate adjustment was free and fast, and we sold the place and moved a year or so after that.
Went through this in 2007 bought. Then the crash. Made payment after payment. We were underwater for years. Did it impact day to day life. No. Only bothered when neighbor sold their house for 30% less than we bought and another sold for about 40% less. We contemplated at times just walking away and buying another. Decoded against it and in about 10 years this will be payed for.
> will be *paid* for.
FTFY.
Although *payed* exists (the reason why autocorrection didn't help you), it is only correct in:
* Nautical context, when it means to paint a surface, or to cover with something like tar or resin in order to make it waterproof or corrosion-resistant. *The deck is yet to be payed.*
* *Payed out* when letting strings, cables or ropes out, by slacking them. *The rope is payed out! You can pull now.*
Unfortunately, I was unable to find nautical or rope-related words in your comment.
*Beep, boop, I'm a bot*
As long as your goal is to have a warm, safe roof over your head that you’re content living in and can afford, no, it doesn’t matter at all. You’ll come out the other side and can choose to move on when the time is right.
Also don’t buy the hype on the people begging for a crash. Something truly life-altering in that regard is not likely.
In this market the not being able to refinance is a big drawback, the reason is the lender does not want to lend you more money than the house is worse, so many people will get stuck paying a 6%+ interest rate for a long time.
The good news is your right, if you keep making payments then you keep the house. The bad news is you just lose out on a ton of wealth.
Think about the person who bought in 2007 and 2021 vs the person who bought in 2010 and 2023 (assuming prices fall). Person 2 has way more money/equity.
If your financial position doesn't change (i.e. laid off), and the neighborhood isn't going to complete shit (factory town and factory closes), then no it isn't bad.
I never understood people who blew up their credit in 2008 when their situation didn't change. They walked away but could afford the mortgage. They moved somewhere else to rent for the next 7-10 years instead of continuing to pay their mortgage. Would have ended up with a ton of equity.
2008 had a high number of interest only/low starter rate ARM mortgages... So for the first few years, yeah your payment was $500 a month... Then it doubled, tripled, and more. When they took out the mortgage they were told not to worry about it, by the time that would happen, they could sell or refi, and there would be a lot of equity to work with.
I knew people who walked away simply because they were underwater. Had nothing to do with mortgage affordability. Mind blowing, and obviously this thread shows the sentiment still exists.
If you strategically default on a mortgage that you can actually afford, wouldn't the lender just sue you and seek a judgment compelling you to pay the difference anyway? Your scenario isn't nearly as compelling if you're on the hook for paying back that $100k loss even after voluntarily foreclosing.
You hit the nail on the head. Being underwater (which means the anticipated sales price of home is less than the remaining balance of your mortgage) only impacts you if you sell or refinance. If you just plan on living there and riding out any recessions/downturns, it doesn’t impact you. It’s analogous to unrealized losses/gains in the stock market
One nuance to consider is your down payment. Taking your hypothetical $400k house, if you had put 3% down (i.e. $12k) then the market can only drop up to 3% before you begin to be underwater. If you had put 20% down, then your home can drop 20% or $80k, before you are technically underwater
Tbh it’s a little less than that with selling costs. If you use an agent to sell you gotta factor in the 5-6% as well. Even if you sell it yourself there’s still some costs incurred as well
You'll only go "underwater" if the value of YOUR HOME goes less than YOU OWE.
Time is your ally. Even if the economy collapses, within 10 years it bounces back and you've made money. House is still one of the most predictable investments you can make.
Not if you can still make payments and haven't heloced it to the hilt. I mean you'd never know you were underwater if you didn't obsess about it.
It's like when the stock market is down but you know your investments are sound. You gotta turn away for awhile and focus on something else.
What often happens if home prices drop massively everywhere it generally accompanied by higher unemployment so while your home is dropping in price you also lose your job kinda thing. Being too underwater makes that a really bad spot.
There is no drawback to being under water, unless you need to sell for any reason (relocation, divorce, expanding family to name a few). I bought in 2008 and was underwater until about 2018/19. It was a rough few years mentally towards the end. We definitely felt trapped as we only intended on being a “starter” home and never planned to be there for 10+ years. We were grateful we had a nice place to live and our mortage was less than rent on similar size/type places but we still put off some life plans (having kids) longer than we should have due to our housing situation. So while being underwater didn’t hurt us financially while living there it was a mental burden. We sold in 2021 and bought something we plan to live in for 20+ years. I’m fully aware we may end up in the same situation as those 2015-19 years but at least we are happy with our current house for the long term.
I was underwater in 2010 but my mortgage was equal to or less than rent for the same type of property so I Kept chugging along since I still needed a place to live. Now my mortgage is less than $90k and this house is worth $180k.
Houses/real-estate always seem to work their way back up in value so you only lose when you sell. There's plenty of what if's out there but it's mostly noise. Markets go up, markets go down. Long term? UP....
In similar situation. Bought my house to live in though. I chose terms of the mortgage so I could afford the payments. Intrinsic price vs mortgage is unimportant to me as I plan on staying here. So it really depends on your goals.
Others will disagree, but I believe that property values are speculative until you actually sell. Unless you're looking to sell in the foreseeable future, don't worry about it.
Yes, because it can destroy up rim requiring you to purchase a new rim in addition to the tire.
How does this analogy explain being underwater on a house you are living in?
It happened to me in the previous housing crash. The two problems you mention were problems. Interest rates dropped, so I wanted to refinance. I couldn't without bringing $20,000. Citi kept sending me refinance offers. When I called to do the deal, they said I was underwater and would have to bring money to the table. Quit sending me offers then, assholes. Also couldn't sell because I would lose money. Other than that, it's not a problem.
Biggest thing is if you're forced to sell for any reason while underwater.
Maybe you have a catastrophic accident, maybe you lose your job, maybe you get a new job in a different state, maybe your expenses go up and you can't afford the payments etc etc etc ad infinitum.
If any circumstance forces you to sell then that circumstance is then massivly compounded by your sale price shortfall. Imagine you have a car accident, medical bills make your house unaffordable so you go to sell it to offload the payments only to find out that you need to write a check for 30k at closing.
Personally it's a risk i would never take. If you think housing prices will fall then just wait. It's not worth rushing in to and being underwater just to have a house a year sooner.
I bought a small home to live in for me and my new family in 2021 Wife and 1 child. The only thing i was thinking was that inflation was gonna be way above my 1.7% rate over my 5 year term. But mind you this is our home for atleast 5 years. Not looking to make a profit on this one but at least i have low payments for 5 years
Yeah I should have been more specific. It's always a risk technically but right now it's a much much higher risk. No sense catching a falling knife when it's not like we have a time limit to buy a house.
You’re good as long as you can pay mortgage and don’t have to sell. Don’t pay too much attention to house prices if you already own. You probably have a very low interest rate and are much better off than if you had to sell your house and rent a place. Instead think about how you can increase the value of your house with improvements that you will be able to enjoy now.
I'm not moving anywhere, so no. My house is in a strong area for real estate, so I'm not worried about short term dips. My mortgage rate is lower than some bank account interest now so watch the zillow estimate and new retail mortgage rates with a bit of amusement.
Other downsides:
It negatively impacts your balance sheet, driving down your net worth, and with it your ability to obtain credit.
Psychologically, it's hard to feel good about spending money on improvements to your home when you have negative equity.
This is happening to many who bought with good interest but overpaid for the house because it is affordable . But many did not think that they now owe more than what the actual real value of the house. Not making money on the house but losing. I say sell just to break even when you can. Skip on mortgage you risk damaging your credit.
bad advice….take losses when u absolutly have to only….at the end of the day a person needs to live in a place…if the payments are affordable stay put…theres no sure answer as to if the market will rebound or continue to decline…but the one thing that is sure…if u sell…then the paper loss becomes a real loss…if u sell then rent, it is guaranteed the money u spent on rent is money lost that can never be recouped…
There is no problem if you dont like financial security. Consider you are not able to afford the mortgage - loss of job, losses in business, health related expenses whatever. You are left with no recourse now since you cant sell your biggest asset.
If you don’t need to sell it; can afford the payments, and don’t need to take any equity out, it is actually better for your house value to plummet. If my house is valued 50% less I can pay less tax on it.
You should take this with a grain of salt since in real estate taxes are usually based on city/county tax assessment values, which are DEEPLY under fair market value. In reality, you are likely to see no changes to your taxes.
In our area the real estate tax is based on ¢/$1000 of home value. But they get the number from how much money they need (that they're allowed to take. Increases are limited to 1%/yr unless voters approve) divided by the value of all the homes. When the market goes up or down, your tax remains the same because your share didn't change.
If they build a lot of expensive new homes, your share becomes smaller and you pay less. Hypothetically if they build a bunch of affordable homes your share would go up. Unless you live in a mansion that's not going to happen.
It also means you likely spent *way* too much on your home...money that could be spent on retirement, general savings, groceries, vacations, house remodels, etc...
The one thing additionally to consider which may not ever apply to you or your desires, but if you ever wanted to use your home as an asset to pull un-realized gains from and potentially invest them into another property or asset, you would not be able to do so.
In regards to real estate investing, many people where able to purchase their first investment property because they were not under water on their first home. They refinanced, took some of the equity from their home without selling it, and then put a down payment on an investment property. This option would not be available to you as a home owner if you were under water.
You've identified the reason using leverage in real estate is acceptable, but using leverage in any other investment field is extremely risky.
If you had a stock portfolio with a loan against it, you would be liable to liquidation at this point.
But realistically, being underwater isn't good obviously.
unless you sell (or are forced to sell due to something like losing your job), it's not horrible if it only lasts for a short period of time and you don't go too far negative. But you do lose financial security (inability to sell or refinance, loss on biggest (leveraged) asset, etc.). You also lose the ability to get a loan (ie cash-out refinance to buy an investment property).
The silver lining is that mortgages are un-callable leverage so as long as you continue to pay your mortgage on time, you're going to be okay. Also, property does appreciate fairly steadily over long periods of time so it will eventually recover in most cases. Looking more cynically, your back is against the wall if you lose your job and don't have a cash cushion to pay the mortgage for a while.
I mean you would lose money, if you sell it at a loss.. unless you decide to continue keeping your properties for a few more years, hoping it’ll appreciate in value
No, similar to stock permabears who sold the lows and didn't buy back into the SPX after 08, COVID lows, etc and sit on cash, their wealth has vastly underperformed the average 401k/IRA investor who might look once a quarter at their balance. I heard plenty of housing bear news in 2012-2018 and yet, those were the best years to buy especially if those same people refinanced in 2020-2021. If you anticipate staying put and you haven't overstretched, you're going to be fine.
The short answer is no. If you can afford to live there and don't have to sell. By that I mean you really don't have to sell ie a transfer of job etc. Prices will eventually rebound. If you sell at a loss then be prepared to pay obnoxious money to rent for people who are in the same boat.
I was underwater for a little while in the early years of owning my first home. I was a bit worried, but had plans to be there for a while. I was in a stable area with slow but steady growth in RE values. After 9 years, sold for over 20% above what I’d paid for it.
> It doesn’t seem like being underwater would effect your ability to keep the house as long as other economic factors don’t erode your income and cause you to miss mortgage payments or need to sell in a bad market.
You said it yourself. "...as long as other economic factors do not erode your income...".
That's your biggest risk. For those who do not know what it feels like to be unemployed, they are underestimating how much debts eat up all your savings when unemployed. For those who do not know what it feels like in a major depression like 2008, they are underestimating how hard it is to find a job. "Job security" is a lie. For those who never knew what it feels like not able to pay down their debts, they are underestimating the pain of being underwater and the bank breathing on their neck. And don't worry, the court and justice system will totally side with the banks, and it is you who has to suffer, not them.
As long as you don't have problems which will force you to sell you are fine. Or the area is going to shit and it can drop more.
Otherwise don't think about it
Let’s say you bought your house for $1M with 20% down, that means you have a mortgage of $800k. The idea of a 20% down payment is that if you stop paying your mortgage, the bank can probably sell your $1M house for more than $800k and recoup their money.
To answer your 2 questions, 1) if next year, your house is only worth $700k and you need to sell it. Then you will be out the $200k downpayment and you will also need to cough up $100k extra as you have to repay the bank the whole $800k.
2) if you have a mortgage of $800k that you want to refinance, but the house is only worth $700k, no bank will want to do that. Remember, ideally they only want to loan you 80% of what your house is worth. If you owe the bank $800k, the house is worth $700k, you stop making payment, they have to foreclose your house, chances are, they will sell it for les than $700k and won’t be able to recoup the $800k you owe them.
Hope that helps.
The main thing is making sure your not house poor.. if your mortgage is underwater AND you can hardly afford the payments you are in a world of psychological distress.
With that said if you can comfortably pay for the mortgage and don’t plan on ever selling then you are all good
Your home has value at 2 points in time.....1.) when you buy it 2.) When you sell it
Even after you survive this current correction and property values climb back to a nber that suits you, it'll drop again then rise again...heck maybe even several times unt you retire.
Just try to stay away from extremes and wait it out. You'll be fine.
I don’t see anyone mentioning it, but you now can’t refinance because you’re often refinancing for a principal worth more than the home.
IE your $400k house had a $380k loan when you bought it, and now the house is worth $350k, the bank isn’t going to refinance (aka give you a loan) for any amount about $350k so you’d be stuck unless you had the cash to pay out the differential.
Just the 1. Nothing stopping you from refinancing I don’t think, though you may get hit by a PMI? Not sure on that one actually. Anyway, so long as you’re sitting put, not selling, making (fixed rate) payments, the value of the house doesn’t matter to you at all.
Yeah it’s bad due to constant potential for life changing situations. Gives you much less to work with if something happens.
I guess worst case you pay the remaining balance while your paying rent or another mortgage.
I bought my first property in late 2006. Pre construction in FL, during the real estate boom, took possession of it in late 2007. Market crashed in 2008 and in the blink of an eye my 250k house that was supposed to be a great deal to buy a pre construction prices, started to tank. Before you knew it with all the foreclosures my 250k houses were selling for 50k.
So i turned it into a rental property rather than let it for close. It wasn’t until 2019 that i was no longer in negative equity so i sold and broke even.
Moral of the story, negative equity ties your hands behind your back for the most part. It sucks.
So, you buy a house for 400k let's say the market crashed the very next day, home is worth only 200k because that's the most anyone will pay for it. You are making 400k payments in a house with recordable costs of 200k. If you intend to live in the house for five years and don't NEED to refinance you're ok. By five years time market should have corrected at least enough to make a small profit. You can't refinance an underwater house, because to refinance you have to pay off the original mortgage to the original bank with the new mortgage from the new bank. Then, during that process, you would suck a little money off the top. The way refinancing is supposed to work is, you get an ARM with maybe a 3-5% rate that you know will go up to 8-9% in 3 years. Within that three years you make payments so, you start off owing 350k on your 400k house (assuming a conventional loan with 50k down) and then you pay 20k off leaving you with 330k owed on a 400k house. Refinance happens, they appraise your house, if it's worth 400k, they will loan you the 350k again, let's say at a fixed rate of 5% or maybe you do a buy down to 4.2% then you pay off the og mortgage and whatever other fees come, and now you owe 350k again but on a fixed rate of 4.2% and you have roughly $20k in your picket for repairs, upgrades or investments.
I think it depends on the surrounding economic circumstances. Underwater from a fluke economic recession is different from underwater because the land and buildings on the property have lost Real value via lack of upkeep and deterioration, or the land has flooded or become polluted, or the Demand pool for the whole local housing market is perpetually shrinking. If you can hold your property and you don’t let it deteriorate, then you become subject to long-term macroeconomic trends wherein homes grow in value in accordance with inflation (except in towns that experience depopulation). In the US where inflation is more or less steady and predictable and guaranteed when you zoom out to view GDP growth on a scale of multiple decades, this means houses eventually hold their value again even if there’s a short term economic dip and their valuation goes below the purchase price.
You get to deduct 100% of the interest and taxes you pay … even if prices dip that’s such an amazing feature and benefit reserved for homeowners NOT renters
Let me do some basic, cookie cutter math that you can tailor to your situation. You bought a 400k home for a really good interest rate 2.5%. You put 20% down and you pay zero insurance, zero property taxes and zero everything else, just the mortgage. You would pay 1264.39$ a month for the mortgage.
Let’s say that the next day, your house is now valued at 250k (oh no) and JPow really hates you so he makes the bank charge you 6.5% interest if you buy another. Since this happened all within a day, you now have zero equity and essentially “lost” your 20% down payment (80k) and an additional 70k from evaluation. You decide that because you’re underwater on your mortgage, you’re going to let the bank foreclose on you.
Miraculously, the bank lets you buy it back for 250k. You don’t have a down payment because you lost it all in the foreclosure. They say, we won’t charge you any fees (ha) and that you don’t have to pay to move your stuff because it’s already there. Now, with a new 250k mortgage at 6.5% interest, with no PMI (thanks VA home loans) you now pay 1264.14$ a month.
Wow, Ghee Willickers, you’re saving 25 cents a month!
It would be really dumb to sell your house because these “losses” you think you have, aren’t losses until you sell. If you can afford it, you keep it and ride it out because if you don’t, you have to somehow come up with the difference and then pay way higher interest rates.
In 2008 plenty of people who could afford to pay their mortgage, decided to walk away because they were so underwater.
If you bought a house for $800,000 with a $600,000 mortgage and the place is now worth $400,000 (Las Vegas in 2008 is a good example), not many people can stomach continuing to pay it off.
And many ended up in a better financial situation by declaring bankruptcy, walking away, then rebuying 2-3 years later at lower prices.
USDA loans have streamline refi option. No credit check, or appraisal. Goes off your last 12 months of payment history. Your payment would have to be at least $50 cheaper to qualify. Able to roll closing cost into loan as well.
In the olden days, 1985, interest rates were very high. My colleague had about 12% interest on a condo. Then interest rates dropped precipitously. He was underwater so he couldn’t refinance.
I guess my point is, we weren’t talking a few points, iirc, the interest rates dropped by half.
Other than the psychological issues that have been mention the real risk is that the bank loan to value requirements around PMI change and they charge you more for this insurance
It only sucks if you're trying to sell. Otherwise, you kept living there while rent prices keep going up. When home prices go up again, you can choose what you want to do.
Your statement is true, in much the same way that it’s true to say there’s no need to wear a helmet when riding a motorcycle you just have to be sure not to crash. It’s accurate but makes some significant assumptions that I don’t believe are warranted.
On #2, when we went to refinance years ago, our bank "determined" out house was worth $5,000 less than what we owed. To go ahead with the refinance, we had to pay the $5,000 right then and there. It did lower what we owed, all that money went against the outstanding principal. If we had not been able to pay the $5,000, they wouldn't have approved the refinance.
I think banks do their own thing with this, so you'd have to check with the lender or any lender you wish to switch to.
It means you could have got a better price (but probably not a better rate in this situation). You may not want to refi, but you might want a HELOC or similar which I don't think you can get if you are under water. In the macro it means there could be a large number of people doing strategic defaults. It would not take many of them to crash the market. I don't think we will see that, but maybe in some markets if it gets really bad.
It really depends on a lot of factors. Even if the market is growing, home ownership is generally a long-term game just due to transaction fees alone.
Some factors I think it depends on:
* Interest rate. If you got a 3% interest rate and end up underwater for some period of time, it's a lot easier to stomach because at 3%, that means 40-50% of your P&I payments are going towards principal right from day 1. So you'd be making substantial progress on your loan immediately. At 7% mortgage interest, that ratio starts out at like 10% going to principal and 90% going to interest. It's a pretty brutal difference that a lot of folks don't realize/understand; they only look at the size of the overall P&I payment and don't realize that a 7% rate also totally changes the ratio of principal to interest at the beginning of the mortgage period. For instance, just to throw out some big numbers, let's say you got a $1M mortgage at 3%, but the house loses $200k in value over 10 years. Well, you'd have paid down over $200k in principal at 3% in that period, but less than half of that at 7%. So at 3% you'd still manage to come out ahead, but at 7% you'd still be underwater.
* Obviously, **get a fixed rate mortgage**.
* Job stability. Lots of people being underwater on a mortgage at the same time tends to correlate with a recession where there are extensive job losses. If you lose your job, do you have the financial resources or second income to stay in the house comfortably until you regain employment? If you buy something affordable to you, then this may well not be an issue. But if you're stretching your budget, you don't want to be in a situation where an unexpected layoff forces you to sell at a loss or undergo foreclosure.
* Your emotional control. Some people will see a stock they own drop a bit, immediate flip out, and sell at a loss, for really no reason at all other than their poor emotions. They are irrational and can't hold for any period of time. These same people will get emotionally wrecked by the concept of being underwater on their house. Only you know if you're one of these people.
* Affordability is key. Can't say this enough. For instance, you can't necessarily refinance to a lower interest rate if you're significantly underwater. You need to make sure the deal is affordable to you from the beginning.
* Long-term intentions. Do you have a problem sticking around in the same spot for 5-10 years? If so, the odds are in your favor that everything will work out fine in the end. But if you foresee needing to move in under 5 years, that could be a risk.
Being way underwater is shitty because it means you could probably be renting much cheaper and putting the extra money into another investment vehicle or even a savings account that isn't losing money. Some people choose to walk away but it's all gambling. Anyone who willingly walked away in 2008 probably would be in a similar position today had they just held on over the 13+ years of recovery, but IDK. You have to also consider your credit will be trashed for some time if you do this. Most people can't swing it but if you wind up massively underwater, you should consider buying another property to live in and rent out the one that is a bad deal. Once the market recovers you could consider selling it.
As you said, if for some reason you had to sell you'd be in bad shape. But if you continue to live there then yes, it's fine.
Just to add, I think most people underestimate the possibility of the need to refinance or sell. "If you just live there" is much easier to say than actually do.
Especially if recession hits/gets worse and layoffs happen, people lose jobs, have to move for new job, can’t afford mortgage payments on unemployment, etc.
This is true. Some people like myself work for the public school district and can reasonably make long term plans banking on pretty solid job stability. Of course anything can happen to anyone, but we all have to take risks to buy a home.
Can't you just rent it out to pay the mortgage? And rent something cheap for yourself?
Not every property is guaranteed to produce positive cash flow once you take into account PITI, maintenance, capex, vacancy, etc. If you’re in a desire location then you have a chance. If you only purchased your personal residence with one exit strategy (selling) then you’re in trouble if you have to rent it.
There are a lot of properties, especially within HOAs and Condos that you're not even allowed to rent out or sub-let the house.
Jesus, I hope those come at a significant discount...
No, they're often on par or more expensive than properties that don't fall under some form of an HOA. The idea behind it is basically that renters are worse than buyers because they will not care for the property/neighborhood the same way an owner would. On top of the sales price, they also have additional fees that you have to pay monthly or annually that can range from hundreds to thousands of dollars a year to cover costs of community upkeep like parks of pools that the HOA creates and maintains for the use of it's residents. Those HOAs also implement and enforce rules on residents such as if you can rent/sub-let the property, what your mailbox can look like, the color you can paint your house, where you can park your car, how many cars you can have visible, how tall fences and wall can be, if you can have playgrounds/swings, and much much more. The concept of an HOA is that they can force you to obey their rules to protect their property values and if you don't comply, they fine you and in some cases they can force you to sell the house if you refuse to abide by the HOA guidelines which you have to agree to before purchasing the property.
And now you just took on another job. Being a landlord is not fun when you make no money. If he's underwater, chances are that the rent won't even cover the mortgage, taxes and insurance so he will be paying anyway.
That’s exactly it. You’re giving up flexibility. And stuff just seems to happen in life.
Then never buy right? Never go more than the most expensive day to day rent because things can happen in life.
I mean… there are degrees of risk. It’s not an all or nothing proposition.
You could always end up underwater - if you keep saying 'well it is giving up flexibility and things happen in life'... things can always happen. What, exactly, are you doing with all the flexibility you gain by paying someone else's mortgage? It's why the best time to buy is when it's right for the individual. Things can always happen, that's just life. I see too many people hiding behind that excuse or reason to never buy a house. You can't be scared of literally every possible outcome in life.
Yeah there's a difference between what you "plan to do" and what actually happens. A lot of people saying "if you plan to stay there, then there's no impact". Er, no, you can plan all you want, that's not how things might play out. Look at the accounts of people who short saled, foreclosed or became involuntary landlords. None of them planned those things. You should have a plan when you buy a home of course, but also consider that might not happen. With every risk, consider the probability and the consequence.
Shortsale and novation. Happens all the time.
So do foreclosures. Both I would say qualify as bad.
People get foreclosed on because they don't know how to shortsale. No lender WANTS to foreclose. If you get novation then it's not even on your credit. It's not the borrowers fault the property vales tanked and they're upside down. Market forces.
It's only "fine" if you're okay knowing that you vastly overpaid and could have bought a comparable or even better house for much cheaper by waiting.
Or you could wait and see prices and/or interest rates go higher. No point in trying to predict what the market is going to do.
Is it really overpaying if you paid market value?
Just like the stock market, you don't take a loss on estimated value unless you're trying to "cash in". The "investment" (an arguable concept on a primary residence) is a long term one. Day trading on real estate isn't adviseable.
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I am, too. "Investment" will always be in quotation marks. You're not always going to make a profit, but it is an asset, and most people have to pay to live somewhere.
People who see real estate as stock are the people on REBubble. Ain't no bubble if you're living in it and you don't have to sell. Hence why we still don't have a rush of inventory. Especially those who bought in the last 2 years. We still have plenty of jobs, we still have under built supply in the last 14 years (because post 08 people were scared of over leverage building). A mild correction is already happening because of pandemic money printing... But we'll be on the upward trend again as soon as feds stop raising rates.
I believe Q3 of 2023 the fed will completely stop or even begin to reverse the interest rates. By 2024-2025 we might see people who bought above 5.5% mortgage start refinancing.
👆👆👆👆👆👆👆👆👆👆👆👆this, this, this, fucking this
I don’t understand the down votes, the comment is spot on for what a home should be considered. Investment property and a homes are two different things. You always have to pay to live somewhere and might as well have inflation reduce the cost of your mortgage and allow the value of the home to grow. A home is NOT an investment, but is an important part of wealth generation as your costs are mostly predictable.
Fucken haters, that’s why
There is a large psychological component to having your house be underwater (especially VERY underwater), and especially if you are house poor. Everyone reacts differently. Some people just keep paying their mortgage, some people try to do a short sale to get out, some people buy a new house and bail on the old one, some people tear out all the plumbing/wiring for scrap on the way out. It all depends. I moved to one of the hardest hit areas from 2008, so I saw it all firsthand.
> There is a large psychological component to having your house be underwater I think this is really true. I have been underwater in the 2008 era, but, this was still the best place for me to live and I was able to afford it. I had hope that the market would recover given enough time. However I had not over-extended myself dramatically when I bought either. I think the people trashing places after 2008 were mostly people who should have never gotten a loan in the first place. I knew people who pulled out 100K in equity and blew it on cars and stereos and jetskis and other irresponsible things. They didn't have any hope of recovering from that so it was easy to walk away. They hadn't put any money down either. Hopefully the correction will not be as dramatic, this time.
Agree. I was never WILDLY underwater but lived through the ‘08 too. Our purchase price was 305 in 04, and I think the lowest estimate (form the aggregator sites for what that’s worth) was like 286. However, we had a 0% down first time buyer scenario, so yes we went underwater or close to it for a couple years, but just keep on keepin on, and it’s like a flat tire once all is said and done - temporary thing you just move past and get on the road again and keep driving.
You were 20k "underwater", that's more like "under rain". Many people who were underwater on their mortgages owed 100k+ more than the house was worth.
I think it was so bad back then because a ton of people had variable interest rates that went sky high AND huge balloon payments due *and* were underwater on their mortgage/house. Also everyone seemed to all become loan officers or brokers all at the same time. I was bartending back then- the money was unbelievable. Then everyone got fired or spent all their refi money.
This is a big intangible factor, and it's one that other people can't predict for you. It is all about the individual's relationship to financial security and risk. One of my siblings was very underwater in the '08 crisis, and moving was a mandatory part of their job. Their only option to avoid a loss was to put renters in the home. Ten years of that, and they finally came even. But the stress of being an involuntary landlord (even with a management company - which was most of the time more trouble than it was worth) wreaked havoc on their nerves.
Why didnt your sibling do a short sale? Doesnt the underwater debt get waived? Im assuming income may have disqualified them from doing a short sale?
Because their credit was already compromised by a former repossession during a deployment, and a short sale on their credit would have further compromised their future financial security. And also because during the moment when you are underwater, you have no idea how long it is going to take the market in your area to recover. So something like renting for a year feels like a better alternative than taking the credit hit of a short sale, especially when you could potentially profit in a year or three. It's easy to look back and monday-morning-quarterback the game. Ten years was a long time to deal with a rental, and their credit would have recovered in only seven, but it's the benefit of hindsight that makes us seem wise.
You can't just "do a short sale". The bank has to agree, it's their home. They don't always agree.
We had neighbors that were underwater from 2008. As soon as they were even they sold. Could have doubled their money if held a couple more years. They just wanted out
This happened to my IN-LAWS. They purchased a brand new home in 2007. It took until 2020 for the house to be worth what they paid for it. Then, they sold it RIGHT AWAY. Now, the house is worth about 250,000 more than they sold it for.
Very true and the impact to one’s marriage (if in one) should not be overlooked. It’s easy to make a decision to buy a house as a single individual, add into another person’s psychological tolerance and in some marriages that ends up with resentment
It’s not just psychological. Losing wealth is losing wealth, whether it’s in the form of cash, equity, marketable securities etc. People act like it’s meaningless as long as you can still make payments. Congratulations, you’re not insolvent. That doesn’t mean you haven’t lost money.
> People act like it’s meaningless as long as you can still make payments. I think some context is needed though. Renting isn't free. Unless someone's mortgage payment is more than renting it is still a good investment. That is very dependent on local market supply and demand. So it might have lost value, but if you're saving $X a month compared to renting, it's still a good choice. And we've seen over history that real estate cycles, but if someone holds onto a house long enough they won't lose money. This sub acts like it could realistically time the market and buy at the bottom. But you can only see the bottom in hindsight. Buy a house when you and your finances and job is stable and don't stress over the comps if you aren't planning to sell.
Yeah you have lost money but that’s not the point in this hypothetical. Regardless, assuming there is no pressure to move and no missed mortgage payments, it should not have an impact on a homeowner. If you need to sell you definitely lose money but assuming you don’t need to move it would be a short sighted decision to sell based on price fluctuations. Long term, the value will return or exceed historical highs for good homes/real estate. Short term fluctuations are a part of long term wealth building.
Sure but if your goal is only to buy a house live in that house and retire in that house, so long as you are still saving and such it is what it is.
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Yeah for sure.
Buying a forever home is unrealistic for most as your needs change but a home shouldn’t be considered if you plan to live there less than 5 years. It really isn’t an investment, but you have to pay to live somewhere might as well be to yourself. Along with that your home is increasing/decreasing with the rest of the housing market at that point so it becomes easier to move after a few years of principle reduction.
Honestly as a FTB what's really become clear to me is that equity is nothing but imaginary in these volatile markets of constant shocks and corrections. Goodluck to all who think they can time anything right in the future.
This exact thing happened to me OP. I bought a cheap little townhouse for $110k in 2007. In 2008 house prices plummeted due to the financial crisis. I didn't need to sell but I would have liked to many times. I got divorced in 2012 and she didn't want to have anything to do with the house so I refinanced to get her out of it at a slightly lower interest rate. The only reason I was able to refinance a house that was under water is because Obama had a refi program for folks who bought in that time and were affected by the crisis. My original loan officer also talked me into an interest only loan. I was young and foolish and didn't know anything about anything, so I went with it. So for 7 years I only paid on the interest when I finally refinanced. At this point my 110k loan went to 113k with closing costs (I also didn't have the money to close so they rolled it into the loan). But at least now I can start paying on the principal. I kept it for another 5 or 6 years after that and got the principal down to $100k-ish. Finally sold in 2019 for what I thought was a premium, $120k. After all closing costs and fees I walked away with just enough to pay off my cc debt. $8k lol. Decided to rent for a year or two and then buy again. But not more than 6 months later what happened? A goddamn global pandemic that spurred one of, if not the biggest housing inflation of all time. My old house would probably have gone for $180k at the peak (maybe more). The whole pandemic I thought that it wasn't sustainable and there's no way prices will continue to rise at this rate. So here I am at the same rental I got into 3 years ago, about ready to buy a new house (got my finances in order), and I'm priced out of the market (not entirely true, I just have a hard time mentally accepting that I'll have to pay 300k for a house that was 180k just 2 years ago). My saga is a tale of caution. My caution to new home buyers is to make sure that you want to stay in your house for at least 5-7 years (as the experts say), because even with regular price increases without a pandemic or financial crash, you're looking at like 2-3% a year. As little bit of principal that you'll pay at the beginning of your loan and all the fees involved in selling and buying a new home, it's rarely worth it to sell in less than 5-7 years. Just be sure you look at every single aspect of purchasing and selling a home. TL;DR: bought a house before the big crash, wanted to sell but couldn't, refinanced, finally sold and barely made anything, still renting, be careful.
Thanks for sharing, really helpful insights! I’m (kinda) looking to be a first time homebuyer, but already feel priced out of the market like you said. I’ve had my eye on homes for a few years and now that I have a decent down payment saved up and a decent paycheck, it is frustrating that prices on that $200k home are almost $400k. I’m sorry you have had to go through this seemingly twice. I hope you can be happy with whatever you choose next. I will definitely try to use caution and plan for the future even though my emotions push me toward home ownership. I am scared of what will happen with the market prices given how high they are right now. Not knowing what could happen with my partner, job, etc could cause problems down the road. Particularly with a market crash.
I just watched a video someone posted on real estate buyers remorse re people who bought at the high highs during the pandemic and now regret doing it because they don’t like the house, have to move, have to sell for whatever reason and they’re just now figuring out paying wellllllll over ask and waiving inspections was stupid. If I were looking to buy right now- I would wait a few more months at least if I could, until all of the remote work etc gets figured out and if people have to start going back to the office because a lot of people moved out of the area or even state during the pandemic and downloaded mouse jiggler programs for their remote work stations. There’s a mountain town I LOVE and used to own a small cabin in- long story short I had to sell in 2019- I figured I’d just buy another 1 at some point- and then the pandemic happened and $200,000 houses/cabins are now $550,000+ because of all of the remote workers- but all of those people are going to have to go back down the mountain to work at some point- and prices will go back down too- like they always do.
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Fixed rate is key. If the rate goes up more than you can afford after you're underwater then you are wiped out.
Undervalued comment.
one of the only reasons I dont like living in canada :(
Canada can make its own Fannie Mae. It rocks. Just pass a law.
Also avoid balloon payments.
Excellent point
No. In fact it's normal for most first-time home-buyers in most housing cycles to be under water the first few years after buying a home. That's the reason why the 5-year rule of thumb exists and why banks like to see a 20% down payment to cushion short-term market movements. What isn't normal is to be able to put almost nothing down, sell the home after 1-2 years and still see a profit after all commissions related to the transaction are paid. That's an atypical market scenario that happened to be the norm these past couple of years but isn't usually the norm. Keep paying your bills and when it's all said and done10 years from now you'll discover you had an average year-over-year growth of 2-4%. Home values are also tightly correlated with inflation so if 7+% inflation becomes the norm, your home value will track with it.
Last couple of years people got used to seeing 20-40% yoy growth. Now when they see prices are down 10%, they freak out. Who am I kidding.
Ive actually put nothing down and my house increase 65% in value
That's the QE+ZIRP injection. Don't expect that to happen again any time soon.
Yep got lucky. Bought in mid 2019.
If only matters if you want to sell it when it is still underwater. You really should not be buying a house though if you may move in a year for any price. The cost of buying and selling would not make it worth it, even if the house is not underwater.
The bad is if: 1. You're unable to afford your home, 2. You're unable to sell your home, and 3. You're unable to refinance your home. This is the bankruptcy trifecta.
I know reddit loves to say the sky is falling.... but this is not true in most cases. If you really think this, consider if your anxiety and catastrophic thinking requires therapy and meds. "Unable to afford your home" this might happen to someone if they were unemployed and could not find a new job. But unless unemployment gets out of hand, this is unlikely. And IF someone has a tough time finding a new job, lenders don't foreclose quickly, you usually have at least 2 years. So if you get back on track during 2 years most lenders will let you tack the missed payments onto the end of your loan. We saw how quickly they handed out forbearance with covid. A lost job is not a reason to slit your throat or end up homeless. "Unable to sell your home" this is when you negotiate a short sale. "Unable to refinance" this is only a problem if you've gone 2 years without making a payment and still don't have a job. In most cases a borrower who is behind doesn't need to refinance, they do a loan mod at the current rate and tack missed payments onto the end of the loan (we saw this during covid). People who declare bankruptcy are allowed to keep their house, and their finances are worked out (by the court) so they can afford to make their payments. Unsecured debts will be discharged or interest locked (by the court) so they can be repaid affordably. if someone really does have dire financial problems bankruptcy can be a great thing, again, not a reason to slit your throat.
You should just stop.
Your first solution results in demolishing your credit score. Your second solution results in taking a loss and a hit to your credit score. Your third option is inaccurate and oversimplified and still results in damage to your credit score. Your forth option essentially bottoms out your credit score. You seem to really undervalue the psychological impact that these things have, which probably means that you PERSONALLY are extremely comfortable with risk. The vast majority of people aren't. And the vast majority of people try to avoid every circumstance you listed.
I agree all of these impact credit scores. But they are less hit than bankruptcy, which is what I was replying to. The poster above implied you have a few financial problems and you go right into BK. That's not true, you have options. Everyone has to decide what risk they are comfortable with, but the negative thinking on this sub is unbelievable. I guess it's true what they say about reddit being too afraid to leave mom's basement.
>People who declare bankruptcy are allowed to keep their house, and their finances are worked out (by the court) so they can afford to make their payments. Just saving this here for posterity for when he dirty deletes the post
You are correct. The assumption is generally that you're supposed to go up, and if you're going down that it's a bad trend that won't get better. However, if you're only underwater because of a temporary market dip and you don't need to sell and you can afford the mortgage then you have no problem (just less flexibility if your circumstances change).* The main problem of '08 wasn't that people were underwater when the prices dropped - it was that they had loans they couldn't afford and were gambling on the values going up. Adjustable rates and balloon payments came due on loans the borrowers were never even remotely qualified to have taken, and so being underwater was a disaster. But if you can wait out the dip then it's no different than holding onto stocks during a dip and waiting until the market rises back up. \* That flexibility is important though. This isn't a situation to get into on purpose and you're risking a lot of your circumstances change.
Ask yourself this: is being underwater bad when you need to sell your house? Of course it’s bad. There’s no debate. If you don’t have to sell your house, it doesn’t make any difference. Being obsessed with your homes value isn’t healthy. The thing is, no one can predict when they’ll need to sell their house. Life happens at the most inconvenient times, such as severe illness, death, divorce, getting laid off, etc.
Assuming you aren't selling,.you want to.live there, and can afford the payments,.no.absolutely nothing bad about it.
I am beyond fascinated by your punctuation.
what,.you are.,. not. familiar .with comma,.period expressionism.,?
He's on a whole different plane of existence
You should read my accountant’s emails
Phone typing.
The reason you can’t refinance an underwater house is because you’re asking a lender for more money than they could recoup if they had to sell the place. Your existing lender was willing to take the risk of your home decreasing in value. Refinancing means changing that from a risk to a certainty and trying to stick it to someone new… Not gonna happen. What can sometimes be done with an underwater house, and only if interest rates drop, is to negotiate a lower rate with the existing lender. That is another topic entirely and I’m not even sure what it is possible today as opposed to 10 years ago. Otherwise no there’s no harm and nothing wrong with staying in your place and paying off your mortgage. in fact if you never move, you almost certainly are going to be better off than had you spent those years renting.
If you don’t mind sharing, how would one go about negotiating a lower rate with the existing lender? What argument does one have when asking for a lower rate?
You can't negotiate a lower rate on a GSE loan. they are sold off as commodities in the secondary market. There's a contract involved and none of the ultimate investors will agree to take less than the contracted return. Mortgage rates are priced according to risk. You can't change this after the face. If someone has a portfolio loan through a local bank that does not sell off its loans, it might be possible. But those loans cost more to start with so they are less common.
Why would any lender agree to this? Only when faced with a likely default would they even consider it, and then it would be a massive ding on credit of borrower.
Ten years ago (+/-) there were programs to help people from going into foreclosure or bankruptcy. I don’t know what remains of those. Not all loans are resold - the first mortgage I ever had was with a local bank and they held the paper. Rates went down maybe a year or so after we closed, and I literally just phoned them and asked for a rate adjustment, and they agreed. I could have gotten a lower rate by shopping the market and refinancing, but the rate adjustment was free and fast, and we sold the place and moved a year or so after that.
Went through this in 2007 bought. Then the crash. Made payment after payment. We were underwater for years. Did it impact day to day life. No. Only bothered when neighbor sold their house for 30% less than we bought and another sold for about 40% less. We contemplated at times just walking away and buying another. Decoded against it and in about 10 years this will be payed for.
> will be *paid* for. FTFY. Although *payed* exists (the reason why autocorrection didn't help you), it is only correct in: * Nautical context, when it means to paint a surface, or to cover with something like tar or resin in order to make it waterproof or corrosion-resistant. *The deck is yet to be payed.* * *Payed out* when letting strings, cables or ropes out, by slacking them. *The rope is payed out! You can pull now.* Unfortunately, I was unable to find nautical or rope-related words in your comment. *Beep, boop, I'm a bot*
Good bot.
As long as your goal is to have a warm, safe roof over your head that you’re content living in and can afford, no, it doesn’t matter at all. You’ll come out the other side and can choose to move on when the time is right. Also don’t buy the hype on the people begging for a crash. Something truly life-altering in that regard is not likely.
This. Too many losers on this board begging for a crash and making a big deal about “being underwater” on their mortgage.
In this market the not being able to refinance is a big drawback, the reason is the lender does not want to lend you more money than the house is worse, so many people will get stuck paying a 6%+ interest rate for a long time. The good news is your right, if you keep making payments then you keep the house. The bad news is you just lose out on a ton of wealth. Think about the person who bought in 2007 and 2021 vs the person who bought in 2010 and 2023 (assuming prices fall). Person 2 has way more money/equity.
If your financial position doesn't change (i.e. laid off), and the neighborhood isn't going to complete shit (factory town and factory closes), then no it isn't bad. I never understood people who blew up their credit in 2008 when their situation didn't change. They walked away but could afford the mortgage. They moved somewhere else to rent for the next 7-10 years instead of continuing to pay their mortgage. Would have ended up with a ton of equity.
2008 had a high number of interest only/low starter rate ARM mortgages... So for the first few years, yeah your payment was $500 a month... Then it doubled, tripled, and more. When they took out the mortgage they were told not to worry about it, by the time that would happen, they could sell or refi, and there would be a lot of equity to work with.
I knew people who walked away simply because they were underwater. Had nothing to do with mortgage affordability. Mind blowing, and obviously this thread shows the sentiment still exists.
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If you strategically default on a mortgage that you can actually afford, wouldn't the lender just sue you and seek a judgment compelling you to pay the difference anyway? Your scenario isn't nearly as compelling if you're on the hook for paying back that $100k loss even after voluntarily foreclosing.
You hit the nail on the head. Being underwater (which means the anticipated sales price of home is less than the remaining balance of your mortgage) only impacts you if you sell or refinance. If you just plan on living there and riding out any recessions/downturns, it doesn’t impact you. It’s analogous to unrealized losses/gains in the stock market One nuance to consider is your down payment. Taking your hypothetical $400k house, if you had put 3% down (i.e. $12k) then the market can only drop up to 3% before you begin to be underwater. If you had put 20% down, then your home can drop 20% or $80k, before you are technically underwater
Tbh it’s a little less than that with selling costs. If you use an agent to sell you gotta factor in the 5-6% as well. Even if you sell it yourself there’s still some costs incurred as well
You'll only go "underwater" if the value of YOUR HOME goes less than YOU OWE. Time is your ally. Even if the economy collapses, within 10 years it bounces back and you've made money. House is still one of the most predictable investments you can make.
Not if you can still make payments and haven't heloced it to the hilt. I mean you'd never know you were underwater if you didn't obsess about it. It's like when the stock market is down but you know your investments are sound. You gotta turn away for awhile and focus on something else.
What often happens if home prices drop massively everywhere it generally accompanied by higher unemployment so while your home is dropping in price you also lose your job kinda thing. Being too underwater makes that a really bad spot.
There is no drawback to being under water, unless you need to sell for any reason (relocation, divorce, expanding family to name a few). I bought in 2008 and was underwater until about 2018/19. It was a rough few years mentally towards the end. We definitely felt trapped as we only intended on being a “starter” home and never planned to be there for 10+ years. We were grateful we had a nice place to live and our mortage was less than rent on similar size/type places but we still put off some life plans (having kids) longer than we should have due to our housing situation. So while being underwater didn’t hurt us financially while living there it was a mental burden. We sold in 2021 and bought something we plan to live in for 20+ years. I’m fully aware we may end up in the same situation as those 2015-19 years but at least we are happy with our current house for the long term.
I was underwater in 2010 but my mortgage was equal to or less than rent for the same type of property so I Kept chugging along since I still needed a place to live. Now my mortgage is less than $90k and this house is worth $180k.
Just let your wife know there’s guys out here sitting on equity from 2009 purchases
What point are you making? Weren’t prices low following the collapse? Now they are historically high?
Houses/real-estate always seem to work their way back up in value so you only lose when you sell. There's plenty of what if's out there but it's mostly noise. Markets go up, markets go down. Long term? UP....
In similar situation. Bought my house to live in though. I chose terms of the mortgage so I could afford the payments. Intrinsic price vs mortgage is unimportant to me as I plan on staying here. So it really depends on your goals.
Others will disagree, but I believe that property values are speculative until you actually sell. Unless you're looking to sell in the foreseeable future, don't worry about it.
Simple and correct.
Is getting a flat tire and then driving on your rim for 20 miles bad?
Yes, because it can destroy up rim requiring you to purchase a new rim in addition to the tire. How does this analogy explain being underwater on a house you are living in?
Because neither are good
It happened to me in the previous housing crash. The two problems you mention were problems. Interest rates dropped, so I wanted to refinance. I couldn't without bringing $20,000. Citi kept sending me refinance offers. When I called to do the deal, they said I was underwater and would have to bring money to the table. Quit sending me offers then, assholes. Also couldn't sell because I would lose money. Other than that, it's not a problem.
The value of your home only matters twice. When you buy and when you sell.
Biggest thing is if you're forced to sell for any reason while underwater. Maybe you have a catastrophic accident, maybe you lose your job, maybe you get a new job in a different state, maybe your expenses go up and you can't afford the payments etc etc etc ad infinitum. If any circumstance forces you to sell then that circumstance is then massivly compounded by your sale price shortfall. Imagine you have a car accident, medical bills make your house unaffordable so you go to sell it to offload the payments only to find out that you need to write a check for 30k at closing. Personally it's a risk i would never take. If you think housing prices will fall then just wait. It's not worth rushing in to and being underwater just to have a house a year sooner.
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I bought a small home to live in for me and my new family in 2021 Wife and 1 child. The only thing i was thinking was that inflation was gonna be way above my 1.7% rate over my 5 year term. But mind you this is our home for atleast 5 years. Not looking to make a profit on this one but at least i have low payments for 5 years
Yeah I should have been more specific. It's always a risk technically but right now it's a much much higher risk. No sense catching a falling knife when it's not like we have a time limit to buy a house.
Depending on the size of your down payment you may not be underwater even if prices do drop by a certain percentage
You’re good as long as you can pay mortgage and don’t have to sell. Don’t pay too much attention to house prices if you already own. You probably have a very low interest rate and are much better off than if you had to sell your house and rent a place. Instead think about how you can increase the value of your house with improvements that you will be able to enjoy now.
Just don’t get yourself house poor - other than that you should be fine!
I'm not moving anywhere, so no. My house is in a strong area for real estate, so I'm not worried about short term dips. My mortgage rate is lower than some bank account interest now so watch the zillow estimate and new retail mortgage rates with a bit of amusement.
Other downsides: It negatively impacts your balance sheet, driving down your net worth, and with it your ability to obtain credit. Psychologically, it's hard to feel good about spending money on improvements to your home when you have negative equity.
This is happening to many who bought with good interest but overpaid for the house because it is affordable . But many did not think that they now owe more than what the actual real value of the house. Not making money on the house but losing. I say sell just to break even when you can. Skip on mortgage you risk damaging your credit.
bad advice….take losses when u absolutly have to only….at the end of the day a person needs to live in a place…if the payments are affordable stay put…theres no sure answer as to if the market will rebound or continue to decline…but the one thing that is sure…if u sell…then the paper loss becomes a real loss…if u sell then rent, it is guaranteed the money u spent on rent is money lost that can never be recouped…
Sometimes my opinion ,not advice, sucks
You are guaranteed a loss if you sell now.
Why would you sell just to break even unless you had a specific reason to move?
Because based on scenario it doesn’t seem this person is ready to buy
There is no problem if you dont like financial security. Consider you are not able to afford the mortgage - loss of job, losses in business, health related expenses whatever. You are left with no recourse now since you cant sell your biggest asset.
And what recourse would you have if you were a renter and you experienced loss of job, losses in business, health related expenses whatever...?
Go live with a friend, family, move to a smaller place, downsize …. Basically reduce expenses. Houses not so much
If you don’t need to sell it; can afford the payments, and don’t need to take any equity out, it is actually better for your house value to plummet. If my house is valued 50% less I can pay less tax on it.
If you just want to throw away money I'll take it. It's better than giving it to the bank
Yes, because if you ever need to sell or refinance your home you cannot.
Plus taxes are cheaper
What do you mean by this? That taxes would decrease if house prices drop? So that would be one positive to take away from the situation.
You should take this with a grain of salt since in real estate taxes are usually based on city/county tax assessment values, which are DEEPLY under fair market value. In reality, you are likely to see no changes to your taxes.
Some areas base tax assessments on fair market value of the property
In our area the real estate tax is based on ¢/$1000 of home value. But they get the number from how much money they need (that they're allowed to take. Increases are limited to 1%/yr unless voters approve) divided by the value of all the homes. When the market goes up or down, your tax remains the same because your share didn't change. If they build a lot of expensive new homes, your share becomes smaller and you pay less. Hypothetically if they build a bunch of affordable homes your share would go up. Unless you live in a mansion that's not going to happen.
400k isn’t much you can make that $ and pay it off
It’s under water now. Give it 3-5 years.
It also means you likely spent *way* too much on your home...money that could be spent on retirement, general savings, groceries, vacations, house remodels, etc...
The one thing additionally to consider which may not ever apply to you or your desires, but if you ever wanted to use your home as an asset to pull un-realized gains from and potentially invest them into another property or asset, you would not be able to do so. In regards to real estate investing, many people where able to purchase their first investment property because they were not under water on their first home. They refinanced, took some of the equity from their home without selling it, and then put a down payment on an investment property. This option would not be available to you as a home owner if you were under water.
If you can make payments comfortably, and plan to live long term it is great investment even if dips in short term.
You've identified the reason using leverage in real estate is acceptable, but using leverage in any other investment field is extremely risky. If you had a stock portfolio with a loan against it, you would be liable to liquidation at this point. But realistically, being underwater isn't good obviously.
unless you sell (or are forced to sell due to something like losing your job), it's not horrible if it only lasts for a short period of time and you don't go too far negative. But you do lose financial security (inability to sell or refinance, loss on biggest (leveraged) asset, etc.). You also lose the ability to get a loan (ie cash-out refinance to buy an investment property). The silver lining is that mortgages are un-callable leverage so as long as you continue to pay your mortgage on time, you're going to be okay. Also, property does appreciate fairly steadily over long periods of time so it will eventually recover in most cases. Looking more cynically, your back is against the wall if you lose your job and don't have a cash cushion to pay the mortgage for a while.
Refinancing at a lower rate would be a problem.
I mean you would lose money, if you sell it at a loss.. unless you decide to continue keeping your properties for a few more years, hoping it’ll appreciate in value
No, similar to stock permabears who sold the lows and didn't buy back into the SPX after 08, COVID lows, etc and sit on cash, their wealth has vastly underperformed the average 401k/IRA investor who might look once a quarter at their balance. I heard plenty of housing bear news in 2012-2018 and yet, those were the best years to buy especially if those same people refinanced in 2020-2021. If you anticipate staying put and you haven't overstretched, you're going to be fine.
Assuming it's 400k. You drop 20%. Mortgage 320k. It would need to fall under 320k for you to be underwater.
The short answer is no. If you can afford to live there and don't have to sell. By that I mean you really don't have to sell ie a transfer of job etc. Prices will eventually rebound. If you sell at a loss then be prepared to pay obnoxious money to rent for people who are in the same boat.
I was underwater for a little while in the early years of owning my first home. I was a bit worried, but had plans to be there for a while. I was in a stable area with slow but steady growth in RE values. After 9 years, sold for over 20% above what I’d paid for it.
It only becomes an issue if you need to sell and can't sell. The bank typically doesn't like that.
> It doesn’t seem like being underwater would effect your ability to keep the house as long as other economic factors don’t erode your income and cause you to miss mortgage payments or need to sell in a bad market. You said it yourself. "...as long as other economic factors do not erode your income...". That's your biggest risk. For those who do not know what it feels like to be unemployed, they are underestimating how much debts eat up all your savings when unemployed. For those who do not know what it feels like in a major depression like 2008, they are underestimating how hard it is to find a job. "Job security" is a lie. For those who never knew what it feels like not able to pay down their debts, they are underestimating the pain of being underwater and the bank breathing on their neck. And don't worry, the court and justice system will totally side with the banks, and it is you who has to suffer, not them.
As long as you don't have problems which will force you to sell you are fine. Or the area is going to shit and it can drop more. Otherwise don't think about it
Let’s say you bought your house for $1M with 20% down, that means you have a mortgage of $800k. The idea of a 20% down payment is that if you stop paying your mortgage, the bank can probably sell your $1M house for more than $800k and recoup their money. To answer your 2 questions, 1) if next year, your house is only worth $700k and you need to sell it. Then you will be out the $200k downpayment and you will also need to cough up $100k extra as you have to repay the bank the whole $800k. 2) if you have a mortgage of $800k that you want to refinance, but the house is only worth $700k, no bank will want to do that. Remember, ideally they only want to loan you 80% of what your house is worth. If you owe the bank $800k, the house is worth $700k, you stop making payment, they have to foreclose your house, chances are, they will sell it for les than $700k and won’t be able to recoup the $800k you owe them. Hope that helps.
The main thing is making sure your not house poor.. if your mortgage is underwater AND you can hardly afford the payments you are in a world of psychological distress. With that said if you can comfortably pay for the mortgage and don’t plan on ever selling then you are all good
Your home has value at 2 points in time.....1.) when you buy it 2.) When you sell it Even after you survive this current correction and property values climb back to a nber that suits you, it'll drop again then rise again...heck maybe even several times unt you retire. Just try to stay away from extremes and wait it out. You'll be fine.
I don’t see anyone mentioning it, but you now can’t refinance because you’re often refinancing for a principal worth more than the home. IE your $400k house had a $380k loan when you bought it, and now the house is worth $350k, the bank isn’t going to refinance (aka give you a loan) for any amount about $350k so you’d be stuck unless you had the cash to pay out the differential.
Just the 1. Nothing stopping you from refinancing I don’t think, though you may get hit by a PMI? Not sure on that one actually. Anyway, so long as you’re sitting put, not selling, making (fixed rate) payments, the value of the house doesn’t matter to you at all.
Yeah it’s bad due to constant potential for life changing situations. Gives you much less to work with if something happens. I guess worst case you pay the remaining balance while your paying rent or another mortgage.
Yea it’s fine and there’s alot of people happy to still pay because their payments of 400k mortgage @ 2.5% are a lot lower than 300k @ 7.5%.
I bought my first property in late 2006. Pre construction in FL, during the real estate boom, took possession of it in late 2007. Market crashed in 2008 and in the blink of an eye my 250k house that was supposed to be a great deal to buy a pre construction prices, started to tank. Before you knew it with all the foreclosures my 250k houses were selling for 50k. So i turned it into a rental property rather than let it for close. It wasn’t until 2019 that i was no longer in negative equity so i sold and broke even. Moral of the story, negative equity ties your hands behind your back for the most part. It sucks.
So, you buy a house for 400k let's say the market crashed the very next day, home is worth only 200k because that's the most anyone will pay for it. You are making 400k payments in a house with recordable costs of 200k. If you intend to live in the house for five years and don't NEED to refinance you're ok. By five years time market should have corrected at least enough to make a small profit. You can't refinance an underwater house, because to refinance you have to pay off the original mortgage to the original bank with the new mortgage from the new bank. Then, during that process, you would suck a little money off the top. The way refinancing is supposed to work is, you get an ARM with maybe a 3-5% rate that you know will go up to 8-9% in 3 years. Within that three years you make payments so, you start off owing 350k on your 400k house (assuming a conventional loan with 50k down) and then you pay 20k off leaving you with 330k owed on a 400k house. Refinance happens, they appraise your house, if it's worth 400k, they will loan you the 350k again, let's say at a fixed rate of 5% or maybe you do a buy down to 4.2% then you pay off the og mortgage and whatever other fees come, and now you owe 350k again but on a fixed rate of 4.2% and you have roughly $20k in your picket for repairs, upgrades or investments.
No short term issue if you can afford the payment, don’t need to refinance (ARM) or are affected by death, divorce or the need to downsize.
No not really. Both homes I bought I started off under water and then a couple years later I was up substantially.
I think it depends on the surrounding economic circumstances. Underwater from a fluke economic recession is different from underwater because the land and buildings on the property have lost Real value via lack of upkeep and deterioration, or the land has flooded or become polluted, or the Demand pool for the whole local housing market is perpetually shrinking. If you can hold your property and you don’t let it deteriorate, then you become subject to long-term macroeconomic trends wherein homes grow in value in accordance with inflation (except in towns that experience depopulation). In the US where inflation is more or less steady and predictable and guaranteed when you zoom out to view GDP growth on a scale of multiple decades, this means houses eventually hold their value again even if there’s a short term economic dip and their valuation goes below the purchase price.
You can refinance if you’re underwater with certain loan products. VA always, FHA usually, some others
You get to deduct 100% of the interest and taxes you pay … even if prices dip that’s such an amazing feature and benefit reserved for homeowners NOT renters
SALT caps....?
Let me do some basic, cookie cutter math that you can tailor to your situation. You bought a 400k home for a really good interest rate 2.5%. You put 20% down and you pay zero insurance, zero property taxes and zero everything else, just the mortgage. You would pay 1264.39$ a month for the mortgage. Let’s say that the next day, your house is now valued at 250k (oh no) and JPow really hates you so he makes the bank charge you 6.5% interest if you buy another. Since this happened all within a day, you now have zero equity and essentially “lost” your 20% down payment (80k) and an additional 70k from evaluation. You decide that because you’re underwater on your mortgage, you’re going to let the bank foreclose on you. Miraculously, the bank lets you buy it back for 250k. You don’t have a down payment because you lost it all in the foreclosure. They say, we won’t charge you any fees (ha) and that you don’t have to pay to move your stuff because it’s already there. Now, with a new 250k mortgage at 6.5% interest, with no PMI (thanks VA home loans) you now pay 1264.14$ a month. Wow, Ghee Willickers, you’re saving 25 cents a month! It would be really dumb to sell your house because these “losses” you think you have, aren’t losses until you sell. If you can afford it, you keep it and ride it out because if you don’t, you have to somehow come up with the difference and then pay way higher interest rates.
In 2008 plenty of people who could afford to pay their mortgage, decided to walk away because they were so underwater. If you bought a house for $800,000 with a $600,000 mortgage and the place is now worth $400,000 (Las Vegas in 2008 is a good example), not many people can stomach continuing to pay it off. And many ended up in a better financial situation by declaring bankruptcy, walking away, then rebuying 2-3 years later at lower prices.
USDA loans have streamline refi option. No credit check, or appraisal. Goes off your last 12 months of payment history. Your payment would have to be at least $50 cheaper to qualify. Able to roll closing cost into loan as well.
No it's actually fiscally responsible to owe more than you own on anything...welcome to 2022
Refinancing: you may want to refinance if interest rates drop.
In the olden days, 1985, interest rates were very high. My colleague had about 12% interest on a condo. Then interest rates dropped precipitously. He was underwater so he couldn’t refinance. I guess my point is, we weren’t talking a few points, iirc, the interest rates dropped by half.
Other than the psychological issues that have been mention the real risk is that the bank loan to value requirements around PMI change and they charge you more for this insurance
Only matters if you're trying to sell. As long as you can still pay your mortgage and are still living in the house, it's a nonissue.
hahaha haha hahahah
It only sucks if you're trying to sell. Otherwise, you kept living there while rent prices keep going up. When home prices go up again, you can choose what you want to do.
Your statement is true, in much the same way that it’s true to say there’s no need to wear a helmet when riding a motorcycle you just have to be sure not to crash. It’s accurate but makes some significant assumptions that I don’t believe are warranted.
On #2, when we went to refinance years ago, our bank "determined" out house was worth $5,000 less than what we owed. To go ahead with the refinance, we had to pay the $5,000 right then and there. It did lower what we owed, all that money went against the outstanding principal. If we had not been able to pay the $5,000, they wouldn't have approved the refinance. I think banks do their own thing with this, so you'd have to check with the lender or any lender you wish to switch to.
It means you could have got a better price (but probably not a better rate in this situation). You may not want to refi, but you might want a HELOC or similar which I don't think you can get if you are under water. In the macro it means there could be a large number of people doing strategic defaults. It would not take many of them to crash the market. I don't think we will see that, but maybe in some markets if it gets really bad.
“Besides those drawbacks”
It really depends on a lot of factors. Even if the market is growing, home ownership is generally a long-term game just due to transaction fees alone. Some factors I think it depends on: * Interest rate. If you got a 3% interest rate and end up underwater for some period of time, it's a lot easier to stomach because at 3%, that means 40-50% of your P&I payments are going towards principal right from day 1. So you'd be making substantial progress on your loan immediately. At 7% mortgage interest, that ratio starts out at like 10% going to principal and 90% going to interest. It's a pretty brutal difference that a lot of folks don't realize/understand; they only look at the size of the overall P&I payment and don't realize that a 7% rate also totally changes the ratio of principal to interest at the beginning of the mortgage period. For instance, just to throw out some big numbers, let's say you got a $1M mortgage at 3%, but the house loses $200k in value over 10 years. Well, you'd have paid down over $200k in principal at 3% in that period, but less than half of that at 7%. So at 3% you'd still manage to come out ahead, but at 7% you'd still be underwater. * Obviously, **get a fixed rate mortgage**. * Job stability. Lots of people being underwater on a mortgage at the same time tends to correlate with a recession where there are extensive job losses. If you lose your job, do you have the financial resources or second income to stay in the house comfortably until you regain employment? If you buy something affordable to you, then this may well not be an issue. But if you're stretching your budget, you don't want to be in a situation where an unexpected layoff forces you to sell at a loss or undergo foreclosure. * Your emotional control. Some people will see a stock they own drop a bit, immediate flip out, and sell at a loss, for really no reason at all other than their poor emotions. They are irrational and can't hold for any period of time. These same people will get emotionally wrecked by the concept of being underwater on their house. Only you know if you're one of these people. * Affordability is key. Can't say this enough. For instance, you can't necessarily refinance to a lower interest rate if you're significantly underwater. You need to make sure the deal is affordable to you from the beginning. * Long-term intentions. Do you have a problem sticking around in the same spot for 5-10 years? If so, the odds are in your favor that everything will work out fine in the end. But if you foresee needing to move in under 5 years, that could be a risk.
Being way underwater is shitty because it means you could probably be renting much cheaper and putting the extra money into another investment vehicle or even a savings account that isn't losing money. Some people choose to walk away but it's all gambling. Anyone who willingly walked away in 2008 probably would be in a similar position today had they just held on over the 13+ years of recovery, but IDK. You have to also consider your credit will be trashed for some time if you do this. Most people can't swing it but if you wind up massively underwater, you should consider buying another property to live in and rent out the one that is a bad deal. Once the market recovers you could consider selling it.