Navigating Negative Home Equity Takes Care

Facts and forecasting are crucial to finding your way out

By Amy E. Buttell, Cyberhomes Contributor
Published: April 3, 2007

If you owe more on your home than it’s worth, you’re not alone: Nearly nine million homeowners across the country are in the same situation.

What you can and should do about your negative loan balance depends on a couple of issues, including what type of mortgage you have, whether you can make your mortgage payments now and in the next few years, and your overall financial situation. Here are the steps you can take to evaluate where you stand:

Step 1: Determine your home’s value. Start with getting as precise a handle as possible on the value of your home. “Visit open houses in your neighborhood and talk to your neighbors who are selling their houses,” advises Ed Craine, CEO of Smith Craine Finance, a mortgage broker, in San Francisco. Consulting with real estate agents can help, particularly if they work with local banks that sell foreclosed homes. You can also consult with a certified real estate appraiser; the Appraisal Institute certifies appraisers and can identify an appraiser in your area. And explore Cyberhomes for valuations and neighborhood comparisons.

Step 2: Forecast your payments. Like many others, you may have gone into your mortgage — adjustable or fixed-rate — believing you could refinance quickly; in that case, you may not have paid much attention to what your terms actually are. If your mortgage documents don’t shed light on that, call your mortgage servicer and ask them to explain the terms to you and provide a forecast of what they are likely to be over the next five years, Craine says.

Step 3: Examine your overall financial picture. With these two vital pieces of information in hand, take a critical look at your current financial situation, including your budget and your employment situation. Don’t be optimistic in your projections — you need to be as realistic as possible to have a chance of figuring out the best solution to your predicament. Inflation is rising, so factor in higher gas, heating and food prices.

If you’re able to make your payments now and in the near future and don’t have to sell, sit tight. The only step you should take is to refinance out of an adjustable-rate and into a fixed-rate mortgage, if possible. But if your situation is grimmer, take action now.

“If you owe more than your home is worth, your credit cards are maxed out and you can’t make your payment either now or when [your loan] adjusts, it’s better to face reality now and think about getting out,” says Richard Call, vice president of housing at Consumer Credit Counseling Service of Central Ohio in Columbus.

Get in touch with your lender immediately or contact a HUD-certified credit-counseling agency that can help you determine your best course of action and negotiate with your lender. A lender may be willing to work with you to modify the terms of your loan, including lowering your monthly payments.

Your lender may also be receptive to a “short sale,” in which you sell your house for less than you owe, with the lender forgiving the difference, says Call. Generally, lenders will reap more money on a home that is sold by the present occupant than through a foreclosure, so they are becoming more open to short sales.