Underwater Loans In The U.S.
November 8, 2014 1 Comment
More than nine million homes in the United States alone are deeply underwater as of Dec 2013. Homeowners living all across the country find that they cannot depend on their homes to retain the value given when originally purchased. Many Americans blame this trend on the recession that left millions of people out of work and thousands of U.S. companies closing. As the housing market fluctuates, it causes changes in the value of various homes.
An underwater mortgage is essentially a home that is worth less than the loan on the home. A mortgage is a natural part of buying a home today. Various lending programs let future homeowners make a small down payment and borrow money to pay for the rest of the balance. Some lenders also give borrowers the right to roll the down payment into the loan itself and pay little to buy the home. Other loans allow borrowers to borrow a larger amount that they need to cover the cost of repairs to the property, new furniture or closing costs.
There are a few ways in which a loan may go underwater. The first is because the value of the property decreases at a faster rate than the owner pays off the loan. This is what occurred in Detroit and a number of other parts of the US and the world. A loan may also go underwater because the borrower declines to make regular payments. The late fees and other charges added to the loan can cause the size of the loan to increase faster than the borrower pays off the loan. Some homeowners find themselves with an underwater loan because their interest rate is significantly different than the current average interest rate.
RealtyTrac, which is a company that tracks loans and the real estate market makes a difference between an underwater loan and a deeply underwater loan. A deeply underwater loan means the combined loan amount secured by the property is at least 25 percent higher than the property’s estimated market value. In the United States, there are more than 12 million homeowners currently underwater with their mortgages. Even if those homeowners make regular payments and get up to date with their loans, there is still a high risk that those homes will remain underwater.
The foreclosure rate in the United States and abroad increased dramatically in recent years. When an individual borrows money from a bank in the form of a mortgage, the bank remains the owner of that property until the borrower makes the final payment. If a homeowner cannot make monthly payments, the bank has the right to foreclose on that property. Most banks will attempt to workout agreements with borrowers before going through the foreclosure process. Foreclosing on a home can cost a lender thousands and leave the bank with a property that it cannot sell. Those underwater on their loans are more at risk of foreclosures than others.
With so many homes underwater in America, many in the industry worry that this will cause problems in other parts of the world. The housing market in developing areas of Indian cities went through a number of changes in recent years that mimicked the problems found in the United States. Many residents found that they no longer had the funds needed to pay for homes outright and that they could not obtain funding from lenders.
Until the housing market rebounds from the problems experienced over the last few years, homeowners in all parts of the world will find themselves dealing with low home values and high loans.