As home prices slowly decline, you see the term "house underwater" coming up more and more often. But what exactly does this term mean, does it apply to me and what can I do about it? In this blog we explain it to you exactly!
About the term: house underwater
Rest assured, the term has nothing to do with the water situation in the street. A home under water is a home whose current mortgage debt exceeds the current home value (when sold). To buy a home, you probably took out a mortgage with the bank. Before the bank issues this mortgage they always want to establish the value of the collateral, this is usually revealed through an appraisal.
Changes in the value of your home
After the mortgage is finalized, of course, the value of your home can always change. In recent years, for example, we have seen housing prices skyrocket. Your home would then become worth more every period of time in relation to the mortgage amount on the collateral. As a result, the risk for the bank becomes smaller and smaller, as the likelihood of you being able to repay the mortgage increases as you get more money for your home. For some household
However, the reverse is also true. If you have bought a house and its value drops for a certain period of time, you will have a so-called residual debt. Your house is then worth less than the amount you still owe the bank. If this is the case, your house is under water and you will have to repay the bank in some other way after the sale of your house.
What has changed since the recession?
In the last major recession, the housing market was hit hard worldwide. This was ultimately a combination of unemployment and excessive mortgage debt. In the past, you could borrow extra money on top of the value of your home for such things as buyer's fees and a remodel, more was borrowed than the home was worth. Due to the recession, house prices fell sharply at one point; many households were ultimately left with homes that were bought too expensively.
To avoid this, a mortgage application is looked at more critically these days. The maximum loan amount has been steadily revised downward, applications are more closely scrutinized and appraisals are more accurate. By these means, households are more resilient to future price declines.
What should I do if my house is underwater?
If your home is underwater, there is usually no reason to panic if you continue to live in it. A residual debt is settled only when you sell the house. In the meantime, it is always advisable to pay off the current mortgage (faster), so that the mortgage amount will be a lot less by the time you do want to sell.
