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Fewer homeowners underwater

[Jun 14, 2011.]


At the end of the first quarter of 2011, 10.9 million or 22.7 percent of all residential properties with a mortgage were in negative equity. This represents a small decrease in the number of homeowners underwater on their home loans from the 23.1 percent or 11.1 million in the fourth quarter of 2010. Negative equity occurs either when a property drops in value or when the homeowners increase their mortgage debt or a combination of both of these issues occur.

Mortgage loans and negative equity

CoreLogic's researchers say that declining home values were a major factor in borrowers going underwater, but that an additional important factor was the presence of a home equity loan. According to CoreLogic, "While only 18 percent of borrowers with no home equity loans were underwater at the end of the first quarter, 38 percent of borrowers with home equity loans were in a negative equity position. Over 40 percent (4.5 million) of all negative equity borrowers have home equity loans."

Homeowners who are underwater are not necessarily in any danger of foreclosure or a short sale as long as they can make their monthly payments. If you consistently pay down your principal balance you can work your way out of a negative equity situation. If home prices in your area rise, you will get above water again more quickly.

The danger with a negative equity situation occurs when the homeowners lose their jobs or must relocate and cannot sell the home for enough money to pay off the mortgage. Homeowners with equity can more easily sell their home and move to another area or to less expensive housing, and some will be able to realize a profit that can help them during a financial struggle. They are also less likely to be able to take advantage of low mortgage rates and mortgage refinancing options.

If you are considering applying for a home equity loan to pay off credit card debt, be sure you have sufficient value in your property to avoid sliding into a negative equity situation. Most mortgage lenders will cap the amount you can borrow against your home so that you have at least 5 percent equity in the property, but you may want to borrow even less if you can meet your financial goals while keeping some equity in your home.

Find out more about your options for a home equity loan or a refinance.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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