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Finance

Living Underwater is Fantastic for Fish & Bad for People!

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When it comes to mortgages, you never want to be underwater. Repeat after me – living underwater is for fish, not people!

A person is underwater on their mortgage when the mortgage amount owing is higher than the value of the house. For example, if you have a $450,000 mortgage but you would only be able to sell your house for $395,000, then you are underwater on our mortgage.

This is a not a desirable situation because it means you cannot sell your house without taking the deficiency to the bank in order to pay off the bank. In the above example, the deficiency is $55,000 (=$450,000 – $395,000). The mortgage debt to the bank can only satisfied by a payment of $450,000. This is known as discharging the debt.

Unfortunately for you, potential buyers of your home are only willing to give you $395,000. In order for the bank to discharge your mortgage debt, you would need to take the $395,000 from the buyers of your home and another $55,000 from your own pocket to the bank.

Just out of curiosity, do you have an extra $55,000 lying around? No? Then you, my friend, are trapped in your house.

The Downsides of Being Trapped in a House

If you’ve got no reasons to leave the house you’re in, then living underwater on your mortgage is an academic problem. Since you’re not going anywhere, there’s no issue about having to pay any sort of deficiency to the bank. You can continue to pay your mortgage and wait for the real estate market to recover. Even if recovery takes a decade, you don’t need to care since you won’t be trying to discharge the mortgage on your house.

The situation is quite different if you want to move across the country for a new job, or your health status changes and your home is no longer suitable for you. There are any number of reasons why you might choose to move your current abode to another one. None of them change the fact that being underwater on your mortgage means you can’t sell your place without satisfying your full debt to the bank.

I ask you again, do you have enough money in your wallet to satisfy the deficiency and get the mortgage discharge you need?

Mortgage Rates are Rising

Those without a mortgage can be forgiven for not realizing that the cost of mortgages is increasing. For the rest of you, it’s imperative that you start thinking ahead. When it comes time to renew your mortgage, will your budget accommodate a 1%-2% increase in your current rate?

If the answer is “No”, or “I don’t know”, then you should be making extra payments to your mortgage. Make extra payments as often as you can. And make those payments are large as you can! This will ensure that, at renewal time, your mortgage is as small as it can be. This means that your new payment at the higher rate will be lower than it would be otherwise.

You can use an online calculator to estimate the size of your next mortgage payment. Whatever rate you’re paying now, add 2%. Assuming you’ll be renewing a mortgage of $350,000 and the anticipated 5-year rate at renewal time will be 5%, here are the mortgage payments generated by this online calculator.

  • If you’re renewing with a $350,000 balance at 5%, then your bi-weekly mortgage payment is $1,017.81 or $2,025.62 monthly.
  • If you’re renewing with a $325,000 balance at 5%, then your bi-weekly mortgage payment is $945.11 or $1890.22 each month.

How to Stop Being Underwater

There are a few ways to stop being underwater. Some are harder than others. The most effective way to cease living underwater is next to impossible – you can change market conditions so that the value of your house rises above the balance on your mortgage. See what I mean? That method is next to impossible. Manipulating market conditions likely isn’t within your particular skillset.

Your best bet is to find a way to make extra payments on your mortgage until the balance equals, or is less than, your mortgage’s balance. At that point, the trap is sprung! In other words, what you get from a potential buyer is enough to satisfy you debt to the bank.

Paying extra on your mortgage is a simple plan. Note that I said “simple”, not “easy”. Depending on your other financial obligations, it might not be easy to find the extra money to throw at your mortgage. You might take on another job or start a business. Maybe you’ll sell you no longer need or take in a roommate.

Ridding yourself of non-mortgage debt facilitates another way to make extra payments. Maybe you owe money on student loans, credit cards, vehicle loans, or other consumer loans. As you pay off other debts, re-direct that former payment to your mortgage. Think about it. You were already sending that money to a creditor, so you’ll keep doing so. Your lifestyle won’t change since you were living without that money anyway. All that will change is the name of the creditor.

However you choose to do it, the goal is to stop living underwater on your mortgage.

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