When buying a home, a buyer hopes the value will appreciate over time so they can build equity but unfortunately, it doesn’t always work out that way.
Home values in neighborhoods can rise sharply for relatively simple reasons and home values can also plummet.
These fluctuations can have serious financial repercussions—if a home is purchased before a drop, a homeowner can find themselves upside down on their mortgage.
An upside-down mortgage is simply a mortgage in which the owner owes more than the house is worth. If you can afford the monthly mortgage payments and don’t want to move, being upside down may not have an immediate effect. However, it will take longer to build equity in the home, which will affect a homeowners ability to refinance or sell their home and make a profit.
Unpredictability in neighborhood home values is the biggest cause of upside-down mortgage situations. Sometimes this the se fluctuations can benefits home buyers. When the housing market is strong, buyers can get a home at a relatively low price and sell it a few years later and make thousands of dollars in profit. The opposite is also true. A buyer who purchases a house at peak value stands to lose money when its value falls.es
Nontraditional mortgages—also called high risk mortgages—can lead a homeowner into an upside-down mortgage situation. Many of these allow interest-only payments for the first few years, this keeps payments low but doesn't make a dent in the principal or build any equity for the homeowner. Monthly payments on this type of mortgage generally don't even cover the full interest costs. Instead, the interest payment is deferred and added to the principal. On these mortgages, a home buyer ends up owing more than the original loan. Homeowners in the first few years of these mortgages have little equity in their home.
Selling when you have an upside-down mortgage can be tricky. Buying or selling a home involves additional expenses. There can also prepayment penalties on these types of mortgages that actually charge the homeowner for paying off the mortgage before it comes to term. These fees and penalties add to the cost of selling a house, and increase the amount of money that is owed.
The simplest solution is to continue making mortgage payments, if possible, and wait for home prices to rise again before selling.
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