What's A Home Equity Loan

What's A Home Equity Loan - Written by Ellen Chang Written by Ellen ChangArrow Real Contributing Writer Ellen Chang is a former contributor to. Chang focuses his articles on mortgages, home buying and real estate. His list has appeared in national business publications, including CBS News, Yahoo Finance and MSN Money. Ellen Chang

Edited by Jeff Ostrowski Edited by Jeff OstrowskiArrow Right Senior Mortgage Reporter Jeff Ostrowski covers mortgages and the housing market. Before joining in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal. Connect with Jeff Ostrowski on Twitter Twitter Connect with Jeff Ostrowski on LinkedIn Linkedin Jeff Ostrowski

What's A Home Equity Loan

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Buying a home is a generally sound investment, which allows you to build generational wealth by accumulating equity over time. However, if you buy when prices are high and home values ​​are falling, your home may lose value. You may end up with a mortgage balance that exceeds the market value of your home.

"Being underwater or upside down on a house, car or any property means you owe more than the current value and have negative equity," says Greg McBride, senior financial analyst.

Being upside down is much more common now than it was during the Great Recession. During the 2008 housing crisis, many borrowers were saddled with homes that were valued at far less than they paid. Housing markets can be unpredictable, and home values ​​can drop due to rising interest rates, high foreclosure rates, or natural disasters. Underwater mortgages typically occur during recessions when home values ​​fall, says Jackie Boies, senior director of housing and bankruptcy services for Money Management International, a nonprofit debt counseling organization based in in Sugar Land.

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Say Jane bought her house for $300,000, has a down payment of $30,000 and borrowed $270,000. Two years later, Jane is unemployed, but has a good job opportunity in another state. He needs to sell his house and move, but he learns that home values ​​in his area have dropped and his home is appraised at $250,000—and he still owes $258,400 on his mortgage. Now he is under water, or vice versa.

In addition to falling home prices, homeowners can find themselves in this financial situation when they buy a home with little or no down payment or borrow against most or all of the equity, McBride says.

"Remember that even a stagnant house price can leave you upside down if you want to sell the house shortly afterwards, because the costs of the selling process can more than offset the small amount of equity you have," he says.

Another way to go lower would be to borrow a second financing that is equal to more than 100 percent of the value of the house, or to take out a mortgage that results in a negative reduction of the term of the loan, adds Holly Lott, general manager of the Add branch. at Atlanta-based Silverton Mortgage.

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Many consumers can continue to make their payments and "over time they can add to the right side by paying off some of the principal balance and/or see appreciation in the value of the home," says McBride.

However, there are times when a homeowner should be concerned about their mortgage.

Homeowners who find themselves underwater on their mortgage have several options. One is to stay home and keep making payments to reduce the principal balance on the mortgage.

"Basically, you ride the market until values ​​change and go higher," says Lott. "At this point, it would be good to make extra payments on the principal balance of the loan while you wait for the home's value to increase."

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You have a few financing options available if you're underwater, but you're out of luck. It is possible to refinance the mortgage under water. Available programs include Fannie Mae High Loan-to-Value refinancing loans. These loans are suspended as of December 2022, but the program may reopen in the future.

You may also qualify for a simplified Federal Housing Administration loan if your previous loan was FHA. Unfortunately, the Home Affordable Refinancing Program (HARP) loans ended in 2018.

Homeowners may also consider foreclosing on a short sale and moving into a more affordable housing situation, McClary says.

In a short sale, the lender must accept less than the amount owed on the mortgage, making it a loss, Lott says. Lenders only consider a short sale as a last resort before foreclosure, and it's generally not "a good deal for the homeowner because a short sale will be reported on their credit report and they'll face a deadline before they can buy a home again," he says. ..

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Another option is to simply walk away from the mortgage — a move called a "strategic default" — but, like a short sale or foreclosure, doing so can hurt your future home ownership prospects and credit score. In short, this option also puts you in a bad financial position. If you leave, your lender may even assume responsibility for paying off the debt.

Homeowners should seek advice from a HUD-accredited nonprofit housing counseling agency in these situations to "help identify solutions specific to your situation and community," McClary says. There may be a way to resolve your situation other than leaving, which is really a last resort.

Finally, you can let your home fall into foreclosure. During this process, the bank repossesses the home and the homeowner walks away with his debt cleared, but a credit score that is worse for wear. Many people in bankruptcy also file bankruptcy to discharge other debts.

There are lasting effects to these choices, says Lott. Bankruptcy and foreclosure can stay on your credit report for 10 years, and like other options, limit your ability to buy another home for several years.

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