What do you do when your mortgage is underwater?

Several stories broke today showing that 27% of homes in America are worth less than the amount that is owed on them (up to 34% in Seattle and a whopping 71% of homes in Las Vegas!).  This is a result of the weak economy we’ve been experiencing the past few years, as well as the ease of financing 100% (or more!) of the value of a home as recently as 2008.

So what is a homeowner to do when faced with a home that is worth less than is owed on it?

  • Communicate with your bank.  There are some federal loan modification programs out there that may be able to help you reduce the principal amount of your mortgage.  You can also ask the bank to work with you on improving the terms of your mortgage (reducing interest rates, etc).  This is a low-risk, high reward endeavor.  Your worst case scenario is that nothing happens and you’re still in the same spot.  Best case – you might get some money knocked right off of the top of your loan.
  • Accelerate payments on your mortgage. If you plan to be in the home for several years, you may want to more aggressively repay principal.  Small amounts in extra principal payments every month can make a huge difference.  If you’re paid every two weeks, ask your bank to deduct 1/2 of your mortgage payment the same day your paycheck hits your account.  Over the course of the year you will make one extra payment and by doing this you can pay off a 30 year mortgage in average of 24 years.  Bottom line: extra payments in the early years of a mortgage have a huge impact.
  • Think long and hard before you walk away.  Defaulting on your mortgage isn’t the end of the world.  People can and do recover from difficult financial circumstances all the time.  I believe this should be viewed as a last resort.  It will be difficult to acquire loans of nearly any kind for the next several years and the effects can sometimes last even longer.
  • Talk to a financial planner.  I’m always an advocate of professional advice.  This is a situation that can have wide-ranging effects on your personal finances and the advice of a professional can help you think through all of the consequences.

Have any of you had to deal with your home being worth less than your mortgage?   How did you handle things?