Negative Mortgages

The idea of being upside down on a vehicle is not that new. This commonly occurs when a consumer makes the decision to purchase a new vehicle before they have paid off their existing vehicle. As a result, the balance of the loan on the existing vehicle is added to the note for the new vehicle. The result is that the consumer owes more on the new vehicle than it is actually worth.

Today, many consumers are finding they are now upside down on their mortgages. Unfortunately, this did not occur because they bought a new house and added in the cost of their old home to the new mortgage. This situation occurred in many cases because of the rapid rise of home values in many areas followed by the real estate market crash that sent home values subsequently spiraling downward.

In many markets, especially in California, the majority of homeowners are now actually upside down on their mortgages and that number is increasing rapidly. A large number of these homeowners are consumers who purchased their homes at the peak of the boom. During that time home values doubled and even tripled within a short period of time in many areas. This situation leaves many homeowners wondering what they should do. Options are often based on whether the homeowner is able to continue making their monthly mortgage payments. While some are able to pay their monthly mortgages, especially if they have a fixed rate mortgage, that is not the case with others who took out adjustable rate mortgages.

Homeowners who can still afford their monthly mortgage payments and who are not feeling the pressure to sell due to employment reasons may find they are better off by riding out the market decline. There is a wide belief that once the market bottoms out it will begin to rebound. If that occurs, these homeowners could still be poised to make a profit on their home once the market does rebound.

Other homeowners are not so fortunate; however. In some cases, homeowners simply have no choice but to move now rather than wait as a result of relocation or job loss. Homeowners who have adjustable mortgages may also find they are simply no longer able to afford their mortgage payments as they continue to rise. These homeowners are now facing the bitter reality of foreclosure when they are not able to pay off their debts or refinance their home loans because of tightening loan restrictions.

Homeowners are also facing the reality that their options are reduced because they have little if any equity in their homes. The amount of equity that a homeowner has in their home is often determined by the amount of their down payment. During the housing boom it was quite common for many buyers to purchase homes with very little, if any, down payment. At the time it seemed like a good deal; however, today it is causing significant problems as housing values continue to decline.

This situation is causing further problems for homeowners who would like to take out home equity loans either to make necessary home improvements or to consolidate higher interest debts. Even if they are among the few homeowners who do have equity in their home, they are finding that lenders are increasingly wary of making home equity loans. Just as the default rate on mortgage loans have increased, so has the default rate on home equity loans. Quite simply, lenders are no longer willing to take on risk when they are already holding a number of defaulted loans.

The ability to refinance has also dwindled in many locations. Not only are loan guidelines becoming stricter but most homeowners who are upside down are frequently finding the lower value of their home makes it nearly impossible to qualify for a new loan. In essence these homeowners now have negative equity and lenders are simply not willing to take on that risk.