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How does an underwater mortgage affect you?

How does an underwater mortgage affect you?

By Ron Trujillo/ron@calhomenews.com

Imagine everyone in Oakland dealing with a financial headache, one that can affect everything from their buying power to retirement plans?

That’s the far-reaching effect of negative equity in California.

The housing market has enjoyed a big-time boom—the median-home price is at the highest level in seven years—and many homeowners, especially those who bought in the past few years in the Bay Area and Southern California, are money ahead.

But hundreds of thousands of homeowners—about 402,000—are dealing with an underwater mortgage, where they owe more than the current value of their home, according to the latest Zillow report.

Courtesy Debomb1 via @Flickr

Courtesy Debomb1 via @Flickr

Many of these homeowners bought at the peak of the housing market – between 2005 and 2008, depending on the region – with little or no down payment. Now, they are faced with an underwater mortgage.

In fact, California homeowners have a combined $59.5 billion in negative equity, or about $68,000 per homeowner. And the chance that many of them will dig out anytime soon is unlikely.

‘Continuing to make monthly payments on an underwater home is like renting’

Now, the situation continues to improve especially as home prices rise. For example, fewer than 3% of homeowners with mortgages in San Francisco are underwater and only 6.5% in Los Angeles County. The county has the most underwater mortgages at 75,411, with a combined total of $14 billion in negative equity, but that’s because of its population not necessarily a pervasive problem.

But drive two hours east of the Bay Area or two hours north of Los Angeles and the situation is much different. Madera and Kern counties are dealing with 16%-plus rates of underwater mortgages, respectively. Negative equity is a problem throughout much of inland California, with double-digit rates – and several counties top 19% (Lassen County has the highest rate in the state at 24.8%).

“As long as you are OK paying considerably more than the home is worth, and can afford to continue to do so, your finances should remain intact.” — Than Merrill, national real estate expert

It could be a very long time before these homeowners escape negative equity, says Southern California mortgage consultant Greg Cook.

“Continuing to make monthly payments on an underwater home is like renting, but with the interest mortgage deduction,” he says. “And if one of those pesky ‘life events’ happen (such as a divorce or job loss) and they’re forced to sell, it’s either foreclosure or short sale, which puts subsequent homeownership out of the question for three to seven years.”

Now, if homeowners are making their mortgage payments on time and have no plans to sell, then negative equity is not much of a problem, says Than Merrill, a national real estate expert who founded CT Homes LLC and was a host of A&E’s Flip This House.

“Whenever you are confronted with a debt that exceeds the home’s value, otherwise known as negative equity, your financial position on the asset will take a hit,” Merrill says. “However, the fact that you are underwater may not impact your situation as you may have originally anticipated, especially if you have no intentions of moving anytime soon. As long as you are OK paying considerably more than the home is worth, and can afford to continue to do so, your finances should remain intact.”

Feature photo courtesy of the artists of Unsplashed.

 

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Percent of homeowners with underwater mortgages in California

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