After paying market value for a home in 2007 it is very likely that what was market value is now 10 or even 50 percent below market value. This complaint is a common one in today’s real estate market. Most people are not financial wizards. Most people were told by their parents to buy a home and build equity and have security. We were not told however by our parents what to do when the home we owe $250,000 on is now worth less than $200,000 with no signs of improving.
Options are in no particular order:
A. Continue to pay the mortgage and be patient one day it will be worth what you owe. This equilibrium must occur eventually because as the principle balance is being paid down even if there is no appreciation, the debt on the house is continually being reduced until it reaches zero.
B. Stop paying the mortgage and walk away from the house and accept that your credit will be damaged for a period of time. As this strategy has been exercised so often it now has a name of its own…“Strategic Default”. This option has seen many people do quite well. But the strategic portion has to be more than just walking away. Where will the family live in the meanwhile? How long can the bank be held off on the foreclosure? How much money can you save in the meanwhile? Do you have the discipline to save the money?
C. Try to refinance using a loan modification. This is an incredibly complex and difficult proposition but has saved many a home owner from the options listed above. The problems and issues fall into the category of the “too many to list” rubric. Everything from income brackets to credit worthiness without being too worthy are traps that the novice should not attempt on their own.