Underwater Mortgage

  

Categories: Mortgage

This is bad. Underwater is only good when you're a fish.

You bought that lovely 4-bedroom, 3-bath for $470,000, with $70,000 down in a big, fat, bull housing market. But unfortunately, the good times didn't last...and now Zillow says your home is worth $380,000. And...you just got fired. You need to move.

After $20,000 in commissions and closing costs, your home sale will net $360,000. And that's a problem, because you have $400,000 in loans on it. In essence, you'll have to write a check for $40,000 to the bank to get out from under the mortgage because it's so underwater.

The water line? The amount of mortgage you have on the place. And really, to be fair, then subtracting the commission to the broker who'll sell the home plus closing costs. Bad place to be.

If it ever happens to you, you'll have 7 years of penalty box time, wherein a normal lender simply won't lend money to you. If you qualify for an FHA loan, it's a 3-year penalty box, and you'll still have to get PMI (Private Mortgage Insurance), even if you put more than 20% down.

See: Short Sale.

Related or Semi-related Video

Finance: What are the components of a mo...1 Views

00:00

Finance Allah shmoop What are the components of a mortgage

00:06

payment All right so here's a weird thing about mortgages

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When you borrow say four hundred grand buy a home

00:12

and say in a six percent fixed thirty year interest

00:15

you'll end up paying way more than the four hundred

00:18

grand just in interest Renting the money Think about it

00:22

Well you'll have a monthly pay payment of twenty four

00:25

hundred bucks and by the time you've made thirty times

00:27

twelve per year or three hundred sixty payments you'll have

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paid some four hundred sixty three thousand dollars in interest

00:35

charges Seems like a lot of money to pay out

00:37

of your own pocket But since mortgage interest is usually

00:40

entirely tax deductible well the rial cost to most home

00:43

borrowers is actually meaningful E less than that six percent

00:47

interest maybe something closer to a three and a half

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four percent something like that So while yes on a

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total gross basis you will have paid out more than

00:55

the amount borrowed over the thirty year course in the

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mortgage you'll also have been forgiven loads of taxes And

01:01

for what it's worth over most thirty year time periods

01:03

in history the market has gone up about eight to

01:06

ten percent a year on average Compound did something like

01:09

that So you feel the people mover floor moving fast

01:12

underfoot with inflation pushing things around as you go along

01:16

Well the money you borrow is the principal of the

01:18

loan and that number usually declines by a small amount

01:21

each month As you make a flat payment and it's

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usually gradually paid off Check out what the principal of

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four hundred grand looks like for the first twelve months

01:29

of payments right here Note that the flat monthly payment

01:32

is twenty four hundred dollars and see how the principal

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payed as part of this payment loan thing there goes

01:38

from paydown of three hundred ninety eight dollars Teo Well

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four hundred twenty a year later right Like you're paying

01:45

off principal little by little So you have less that's

01:47

attributed to interest And Mohr that's attributed to principal pay

01:51

down as you go along and note that this assumes

01:54

Ah flat monthly payment here Right You're paying the same

01:57

amount You're one you would You're thirty two thousand three

02:00

hundred ninety eight dollars and twenty cents on this particular

02:03

alone So after a year the amount owed an interest

02:05

is well just slightly last Here in this example it's

02:08

one thousand nine hundred seventy seven bucks down from in

02:11

a two grand and note what it looks like at

02:14

the end of each of the first five years That's

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a big shift from almost entirely interest do now Principal

02:21

being ah meaningful part of it you got after ten

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years right here and then at the halfway point in

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fifteen years it's here So I noticed that the amount

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owed at this point is roughly half the total Why

02:31

Because the lion share the pay down went to interest

02:33

in the first half of the life of the mortgage

02:35

AII those first fifteen years and well then in the

02:38

back half way more will be attributed to a principal

02:41

pay down than to interest Like check out what the

02:43

very last month's payment looks like It's just twelve dollars

02:47

of interest and two thousand three hundred eighty six dollars

02:50

of principle All of this is principal until well then

02:53

the balance is zero and we'll finally Then you will

02:56

have fully paid off your mortgage and own your home

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