You Are Underwater: Now What?

Posted on May 08 By Justin McHood

Raise your hand if you bought a house in the mid-2000s.

Wow! That's a lot of people.

Now, raise your hand if your house is worth as much (or more) than you paid for it.

It's OK. I'll wait.


Right. That's what I thought.

Don't feel bad. Anyone who bought a house in the past three or four or even five years is in the same boat. And it's sinking. Fast. I hate to be the bearer of bad tidings, but even though the mainstream media is trying to say that we've hit bottom and that (HOORAY!) all is on its way back to recovery (I keep expecting to see rainbows and unicorns thrown in with those stories), that situation isn't likely to change anytime soon.

Case in point, a recent study by First American CoreLogic (a group who spends all its time studying such things), which indicates that home values likely won't start to break even -- meaning that they'll actually be worth the amount for which you're mortgaged -- until at least 2015. In some areas, like Detroit and Las Vegas, which have been particularly hard-hit by this economic freefall, that point mightn't be reached til closer to 2020. That's another ten years, folks.

The days of using your home's equity for those unexpected expenses, like, say, college tuition, medical expenses, a special vacation, or (GASP!) even a few home improvements are gone.

So, what to do?

An excellent question. One option is to just lie in the bed that was made for you. When you bought your home, you agreed to make the payments. That, as they say, is what it is.

Lots of people are opting to, simply, get the heck outta Dodge by performing a "strategic default." What this means is that they're simply handing over the keys to their home and returning it to the bank -- even if they're not having trouble making their mortgage payments. Many people feel that they're simply throwing good money after bad, so they're getting out.

This may or may not be a good idea.

With a strategic default, there are many things to consider. How will it affect your credit score is something to think about. Though the mar upon your credit will, eventually, heal itself, it's something that you'll carry with you for years. Years. During that time, you likely won't be able to finance a car, get a credit card, or do anything that requires a credit check. Further, depending on which state you live in (and I'm not talking about "denial" here), your lender may be able to pursue you for the unpaid balance on your loan. Be sure to check with an attorney prior to taking any action.

Another option is to look into a loan modification. While the process is a bit cumbersome, OK … very cumbersome, it's worth the call to your bank. It's possible that you won't qualify, but if you do, you could stand to have your interest rate lowered, your monthly payment lowered, or even the principal on your mortgage lowered (or all three!) I won't get into any arguments about what is or isn't fair, but taking advantage of the HAMP (Home Affordable Modification Program) or HAFA (Home Affordable Foreclosure Alternatives) programs is a great idea if you're approved.

Yes. Being underwater stinks. On ice. It's up to you to decide whether you're gonna sink, or whether you're gonna swim. As for me, I'm heading out to get a snorkel.

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