What is an Underwater Home?

house cartoon

The number of underwater homes is currently at a record high all across the nation, with New Jersey in the lead. Additionally, Atlantic City has the highest number of properties that are underwater when compared with all similar metropolitan areas in the United States. The term “underwater” is being used more and more frequently – but what exactly does it mean?

During the financial crisis of 2007/2008, lenders started granting adjustable rate mortgages to people who weren’t really qualified for a home loan. Many lenders also weren’t requiring buyers to make a down payment, which meant that just about anyone could (and did) buy a house. This led to a housing boom or “bubble” that saw home prices soar.

“Housing bubble borrowers” were able to make their monthly payments at first. However, several years later, many borrowers saw their payments spike much higher than they could afford due to their loan’s adjustable rates. When borrowers could no longer afford their mortgage payments, they started missing payments and quickly defaulted into foreclosure, letting all of the air out of the housing bubble with a giant hiss. Home values tanked rapidly, and the number of underwater homeowners quickly became staggering.

When we talk about “underwater” properties, we’re not referring to that sea pineapple inhabited by an energetic and optimistic sea sponge. Alas, in the real (estate) world, an “underwater” home is one whose owners owe their lender more than the property is actually worth.

Today, the number of Americans who are still underwater on their mortgages is astounding, even eight years after the financial crisis and resultant housing boom. Although we are seeing home prices on the rise again, it’s not enough for those who owe at least 25% more than the actual value of their home.

If your home’s value is less than you actually owe, but you aren’t having any difficulty making the payments, you can ultimately continue living in and paying for an underwater home. It will be more akin to renting, though, due to the fact that you’ll have no equity in the home at all.

Because so many homes are currently worth less than they are mortgaged for, those  homeowners who are struggling are having a hard time selling their home in order to move somewhere more affordable. In order to do so, they would have to actually pay their lender the difference between their home’s value, and what they could sell it for.

Underwater homes lead to missed mortgage payments, which leads to lenders putting home after home into foreclosure because they are afraid of losing too much money.  Currently, approximately 1 in every 594 New Jersey homes is in foreclosure.

While underwater homes and the shocking number of foreclosure filings in New Jersey certainly don’t make for a happy ending, tune back in to our law blog next week when we discuss something even more frightening……

…..Zombie Foreclosures.

 

 Image credit: Stock Monkeys

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4 Responses to What is an Underwater Home?

  1. Pingback: New Hope for New Jersey ‘Zombie’ Foreclosures | Veitengruber Law

  2. Pingback: New Hope for ‘Zombie’ Foreclosures in New Jersey | Veitengruber Law

  3. Pingback: Should I Settle my Debts or File for Bankruptcy? | Veitengruber Law

  4. Pingback: What is the Best Foreclosure Alternative? | Veitengruber Law

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