Negative Home Equity

Posted on Thursday 24 September 2009

Negative Home Equity
Source: http://www.flickr.com/photos/robertkaleta/3660350489/

This is guest post by Fran Budd, a banker with ten years experience in investment banking in London and now freelance writer for Australian credit card comparison website Credit Card Compare.


You feel like you are teetering on the edge. It felt like only yesterday that you were chatting about how much houses were worth in your area. Getting a 100% mortgage was as easy as buying a piece of pie – ‘We’ll even throw in some steak knives with that!’. Now you feel trapped. You would like to move – but your home is not worth what you paid for it.

‘Negative Equity occurs when the value of an Asset used to secure a loan is less than the outstanding balance on the loan.’

As House values continue dropping, in the US the decline has left about 20.4 million homes (out of 93 million) with negative equity. This sharp decline is happening throughout the world. The statistics are frightening, but if you can afford your mortgage, have a stable job and like where you live – then ride out the storm. Now is not the time to sell as you will owe the bank money – most people don’t have this kind of spare cash lying around!

There are other options to consider.

#1 Mortgage or Renting?

Negative equity is only a problem if you want to sell or need to re-mortgage. If you didn’t own your property you would be paying rent. So treat your mortgage the same as if you were paying rent. Think positively – you are paying off your home! It may not be worth much now, but it is still worth money and will rise again in value.

#2 Rent Out a Room In Your House

You may have thought your flat-share days were over…But if you have the space, and can clear out a spare room – then this will bring in much needed income.

#3 Move in with Family/Friends or Flat-share

Okay, so it is not an appealing thought to rent out your home and move in with others…But, if it can help you afford your mortgage, even if it just for a short time – it is well worth it! You may be able to get reasonable rent that can cover your mortgage on your current property. You may even cover the mortgage and have excess! Whilst you cannot sell, others also cannot buy! (Banks want huge deposits at high rates) This means higher rental demand – pushing rental prices up.

#4 Rent Out Your Property and Buy Another Property

If you do have the deposit, you could potentially buy another place. As we all know, it is a great time to buy if you can afford it, as properties are going for a lot less than they would be if the market was stable.

#5 Downsize

If at all possible, exchange your bigger house (bigger mortgage) for a smaller more affordable mortgage. It may not be the ideal time to sell, but if you can afford the legal and banking fees it is a good time to buy. This can work for you further – if your current lender allows you to transfer your mortgage deal, keeping your rate.

#6 Start Chipping Away at Your Mortgage

It goes without saying that if you have any spare cash (but don’t leave yourself short) put what you can onto your mortgage. In these tough times, your lender will look more favorably on you if you are paying bits off. This is important for when/if you need to renegotiate your mortgage. Find out from your mortgage provider – how much you can pay off yearly. Generally, if you are on a flexible plan, you can pay off 10pc of the outstanding debt.

#7 Re-Financing

If you need to renegotiate your mortgage – your best bet is to stick with your current lender, as no lender is currently offering mortgages for more than 100% of the property’s value. This means potentially being stuck on the higher variable rate. If you are a good debtor i.e. you have been regular with payments and even paid off some of your mortgage – you may be able to negotiate a deal with your lender, as it is in their interest to help you pay off the loan – not get stuck with your property!

#8 Budget and Save

It is a hard time when we have to constantly watch our purse strings. Predictors are saying that the recession should lift in 2010. If at all possible – Keep to a budget ensuring your mortgage and bills are covered. If you have any spare money – keep aside for emergencies.

#9 Make Improvements to Boost Value

Find ways to make improvements. Fresh paint, updating décor, planting a garden, furnishings etc can improve a house no end. Potential buyers often cannot see the wood for the trees. Minimize i.e. remove clutter, paint the walls neutrally, and create ambiance with the furnishings. Go for an elegant look with colors that meld. Do up the garden. Plant some trees, mow the lawns. Create an appealing outside space that works for the property.

#10 Sell Your Property to Avoid Repossession

If at all possible, aim to have at least 5% equity before you sell. However, if you are completely struggling and cannot see how you will pay your mortgage, or are already missing payments – then you may need to sell. You might be selling at a loss, but at least you won’t lose your home entirely and be made bankrupt.

#11 Get Your Property Valued and Check Sell Prices

If you have to sell, get a few agents to come in and value your property. This will give you a good idea of what you can achieve. Check the prices that properties sold for in your area. There are numerous ways to do this i.e. checking online sites or with the relevant estate agents.

savvy @ 8:00 AM
Filed under: Homebuying
The Penny Pinchers Club

Posted on Monday 21 September 2009

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I read The Penny Pinchers Club by Sarah Strohmeyer while on my recent vacation. It is what I consider the perfect beach read. It was so entertaining that I couldn’t put it down. I’m pretty sure I read the whole thing in one day. It actually had me laughing out loud.

In the book, the main character decides to stop her spendthrift ways and start saving money for a divorce. While most of the savings tips in the book won’t be new to pf readers, it was far from boring. I won’t spoil the book but merely suggest that you pick it up for yourself.

Have you read any good pf books lately?

savvy @ 8:00 AM
Filed under: General Finances
There’s Always a Catch

Posted on Friday 18 September 2009

planning my time - tough nut to crack
Creative Commons License photo credit: kstephen1752

Most of you probably remember the new tax credit that went into effect earlier this year. The Making Work Pay credit automatically decreased your withholding and put a few more bucks in each paycheck. Easy, right? Well not as easy as you probably thought.

In order to claim this tax credit (assuming you’re eligible), you will need to complete the new Schedule M next year. Schedule M is required whether you itemize or not. For more information, go to the IRS website.

savvy @ 6:19 PM
Filed under: Taxes
What’s Going On

Posted on Tuesday 15 September 2009

Sorry I’ve been lax with the updates.   What’s going on with me?  Today is the final exam in the class I’ve been taking.  So far, I’ve gotten no less than 94 on all the tests and homework.  I have one more assignment to turn in today (which might even be a B because I gave up at the end) and then the final exam.  I was out of town for two weeks so that put me behind and I’ve had a hard time catching up.

The next quarter starts September 30 so I need to register for the next segment of the class.  I’ve been slacking and never bothered to take the necessary steps to get the $120 refund I’m owed from the school for cancelling a class.  I guess that money will transfer over for the next class I’m taking.

Biting off more than I can chew has cost me.  I was taking an online course as well (a bad idea, I know) and that course is set to complete this Friday.  However, I am nowhere near finished so I will have to pay $100 to extend the course for three more months.  I can’t afford to procrastinate again.

Mr. Savvy and I are contemplating starting another small business.  I haven’t done all the necessary research yet but if we do, it definitely won’t be until after the beginning of the year.

As to why I was out of town for two weeks – a much needed vacation.  Mr. Savvy and I went to New Zealand and Fiji.  Though the weather was horrid the first week (cold and rainy), we made the best of it.  We had great fun but it was definitely a hit to the finances.  Needless to say, budget talks are on the agenda for this weekend.

What’s going on in your financial world?

savvy @ 10:02 AM
Filed under: Budgeting andSmall Business andTravel