Tip to Avoid Ever Having Negative Equity

Twenty percent of all U.S. mortgages are underwater, and seventy percent of Nevada mortgages have no equity. The only way for underwater homeowners to sell their homes is if they have some serious cash reserves, or can get the bank to O.K. a short sale. These statistics are quite disturbing. The real estate market in Nevada during the boom was too drastic, and their recovery is most painful. The way real estate trends are headed, we will likely see real estate declines for Herriman UT Homes and SLC UT Real Estate . It’s also not likely that home values will see any significant appreciation any time in the next five years.

Is there way we can prevent any more decline in real estate values? Is there any way that we can prevent this from happening to us?

Not Really. There is very little we can do about the external factors associated with home prices , the federal government has tried to , but we do control how much we owe on our mortgage loans . The way 30 year amortized mortgages are set up, there is very little principle paid and equity gained during the first few years.

One way to drastically reduce the principle owed is to refinance to a fifteen year mortgage. Right now, the average interest rate for 15 year mortgage loans are the lowest they have ever been. Your monthly payment will likely rise with a 15 year fixed mortgage, but you will pay the loan down substantially more each month. In just the first year of a 15 year fixed mortgage loan, principle is decreased by nearly 5%. This would keep your equity percentage equal with a five percent market decline.

And, this was just the reduction in the first year. The amazing thing about amortization is that the amount, and rate, of principle payed off increases every year.  During year 5, the loan amount will be reduced 7.5%, year 10, a reduction of 15%, year 14, 50.6% and year 15, it will be reduced 100%. At this point, you will actually OWN the property. After fifteen years with a 30 year mortgage, the loan is only 30% paid off after fifteen years. 50% equity isn’t acheived until after the home owner has made payments for more than twenty years.

Over the last few years attitudes towards home purchases have clearly changed. Mortgage lenders used to recommend “no money down loans,” “option ARMS” and “interest only loans because real estate was an automatic investment. The smart thing to do is pay off a mortgage so you can own a home free and clear. Home owners with real equity are free to sell their house at any time, and don’t have to rely on bank appoval.

Tags: , , ,

Leave a Reply