If you ever find yourself in a situation where your home's value has decreased and you owe more on your mortgage than your residential, rental or commercial property is currently worth then you have an "underwater" or "negative equity" situation. There are several options you can consider:
- Stay Put and Wait: If you can afford to keep making mortgage payments and you're not facing any immediate financial hardships, you might choose to stay in your home and wait for the real estate market to improve. Property values can fluctuate over time, but there is a good chance that your home's value will increase in the future, especially in California. Think back to the real estate mortgage crisis of 2006/2007- no one thought those values would recover but over time many people witnessed property values double and triple over time.
- Loan Modification: You can reach out to your mortgage lender and inquire about a loan modification. In some cases, lenders may be willing to adjust the terms of your loan to make it more manageable, such as lowering the interest rate, extending the loan term, or even temporarily reducing the monthly payments.
- Refinancing: If interest rates have dropped since you initially took out your mortgage, you might consider refinancing. While it may not directly address negative equity, refinancing at a lower interest rate could potentially lower your monthly payments and make it easier to manage the loan. Talk to your local mortgage broker about your options.
- Short Sale: In a short sale, you sell your home for less than what you owe on the mortgage, and the lender agrees to accept the proceeds as payment in full, forgiving the remaining debt. This option can help you avoid foreclosure and the associated credit damage, but it requires lender approval and can be a long and complex process.
- Negotiate with the Lender: Some homeowners in distress try to negotiate with their lenders to settle the debt for less than what is owed. This option is known as a "deed in lieu of foreclosure" or a "mortgage write-down." In California that option is not very likely to succeed as most lenders would rather go through foreclosure than receive property via a deed-in-lieu. Discuss your options with a local real estate attorney before going down this path.
- Renting Out the Property: If you can't afford the mortgage payments, could the rental income from the property cover the mortgage and related expenses? Consider renting out the property. Becoming a landlord comes with responsibilities and potential challenges but it might fit your situation. You could then keep the property and hopefully wait til the value increases over time.
- Government Assistance Programs: Depending on your location and the specifics of your financial situation, there might be government programs or initiatives that can provide assistance to homeowners facing negative equity or foreclosure.
- Bankruptcy: Bankruptcy might be an option to explore if you wanted to just walk away from the property. Maybe you have significant other debt and are unable to keep up with your mortgage payments. Consult with a bankruptcy attorney (Call David Arietta at: 925-472-8000) to understand the implications and potential benefits in your situation.