Everyone has a dream scenario for owning a home, but for many people who recently purchased a home, the recent recession has caused home values to plummet and derail the dream scenario. As values drop quickly, a new homeowner may find him or herself in the situation where the loan balance is much greater than the current value of the property. This is referred to as being “upside down” or in negative equity on the loan. For new owners suddenly finding themselves in this position, below are 5 tips to weather the storm.
Prioritise
Having a roof over the heads of yourself and your family is a comfort that simply can not be overstated. Any unrelated problems will be exacerbated by the anxiety caused by the loss of the family home. Additionally, professional issues arise as lacking a stable address and base from which to carry on with life can cause many unexpected difficulties. A homeowner in negative equity needs to prioritise. Understanding that the importance of the home outweighs the luxury of having 250 channels, subscriptions to online games, or eating out 3 times a week allows a homeowner a clear look at what areas in which to concentrate belt-tightening efforts.
Consider Repurposing a Part of the Home
Establishing a section of the home as a legitimate home office can bring extra tax benefits. That bonus room that is being used to store holiday decorations could be converted to another bedroom a boarder could rent. Any change that could save money or bring in a little extra income would help the situation.
Work with the Bank
Loan officers do not live in a vacuum. They understand that times are tough and people are having a hard time hanging on. Believe it or not, they would prefer not to foreclose on the property. In tough economic situations, most banks are willing to negotiate a period of lower payments with customers who have been responsible. The most important point in dealing with a bank is being responsive. Ignoring calls and letters will give the bank no option but to set foreclosure proceedings into motion.
While hanging on to the home by any legal means possible is generally the best long term option, often losses of income make this impossible. Under these circumstances, the homeowner in a negative equity situation often feels trapped because he or she needs to sell, but cannot get enough to cover the existing loan.
Consider Cheap, Valuable Home Improvement
Often very inexpensive home improvements can yield large increases in home value. Cosmetic improvements like new paint or siding or updating of out-of-style kitchens and baths could increase the home value enough to allow a quick sale and escape from the situation.
A Short Sale Agreement Might Work
A short sale is an agreement where the bank discounts the home loan to allow the owner to sell at current market value. This saves both parties from dealing with the foreclosure process.
Having a strategy to hold on as long as possible and exit the situation if necessary is something all homeowners should consider when a negative equity situation could occur.
About the Author
This is a guest post from Money Choices, a leading Australian website where home owners can find the lowest refinance home loan rates using their dedicated home loan comparison tools.
