Home Real Estate What Is An Upside Down Mortgage? Here’s What You Need To Know

What Is An Upside Down Mortgage? Here’s What You Need To Know

by Ozva Admin

buy a house This often seems like a promising strategy for building wealth, as your monthly mortgage payments can help you build equity, and home value typically appreciates over time. However, sometimes due to housing market conditionsthe value of your home could actually depreciate, and the value of the house may fall below the amount of money you borrowed to pay for it.

This phenomenon is actually known as a “submerged mortgage,” which can also be called a reverse mortgage.

“A reverse mortgage is when the principal exceeds the value — in other words, you owe more than the house is actually worth,” says Christopher Rotio, executive vice president of City Title Agency.

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How do you end up with a reverse mortgage?

A reverse mortgage is usually the result of short-term fluctuations in the real estate market. Therefore, in a market where home values ​​are at the high end due to, for example, a home buyer likely to need a largest loan to cover the cost of the house.

But if the value of the home goes down for whatever reason, the amount of the loan you borrowed doesn’t go down with it; you will still owe what you borrowed even though the house is worth less.

“As the economy changes, you find yourself in a situation where home values ​​normalize and come back to reality,” Rotio explains. “So it’s not worth the same as when it was bought.”

Is a reverse mortgage bad?

market volatility It can always feel uncomfortable and many people tend to be inclined to take action during this time. But just like dealing with volatility in the stock ExchangeThe best way to deal with volatility in the real estate market is to do nothing, as the tides will turn again and your home’s value is likely to recover over time.

However, you can be in serious trouble if you have a reverse mortgage and are trying to sell your home. According to Rotio, if someone in this situation sells their home for an offer that’s still less than what they owe on their mortgage, the home seller will have to pay the difference out of pocket to their lender. Depending on the situation, this could end up costing the home seller tens of thousands, or even hundreds of thousands, of dollars.

“I don’t recommend selling if you have a reverse mortgage, but due to extenuating circumstances, some people have to sell anyway,” says Rotio. “They would have to be prepared to pay the difference in this situation.”

What should you do if you have a reverse mortgage?

“Sometimes the best action is inaction,” says Rotio. That sentiment certainly applies here.

Simply avoiding drastic action like selling your home when the value has crashed will allow your home’s value to recover over time until you no longer have a reverse mortgage. Rotio also recommends being strategic during this time and making extra mortgage payments so you can pay off the principal faster.

“The point of doing this is that once the market settles down and values ​​go back up, you’ll have a lot more equity in your house,” he says. Making extra payments even when you have a reverse mortgage can also ensure you pay less out of pocket to your lender if you need to sell the home before the values ​​have had a chance to fully recover.

Is there a way to avoid a reverse mortgage in the first place?

sofi

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; Fixed and variable rate mortgages included

  • types of loans

    Conventional loans, jumbo loans, HELOC

  • Terms

  • credit needed

  • Minimum initial payment

ally bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; Fixed and variable rate mortgages included

  • types of loans

    Conventional Loans, HomeReady Loans, and Jumbo Loans

  • Terms

  • credit needed

  • Minimum initial payment

    3% if you move forward with a HomeReady loan

advantage

  • The Ally HomeReady loan allows for a slightly lower 3% down payment
  • Pre-approval in just three minutes
  • Submit applications in as little as 15 minutes
  • Online support available
  • Existing Ally customers can receive a discount applied to closing costs
  • No lender fees

cons

  • Does not offer FHA loans, USDA loans, VA loans, or HELOCs
  • Home loans are not available in Hawaii, Nevada, New Hampshire or New York

Editorial note: Any opinions, analyses, reviews, or recommendations expressed in this article are solely those of Select’s editorial staff and have not been reviewed, approved, or otherwise endorsed by any third party.

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