Mortgage worth more than your house?

Posted by admin on March 6, 2009 in Real Estate

Collectively, we tend to obsess over the value of our homes. Even though we have no intention of moving, we like to know what the neighbors listed their homes for and, more importantly, what they got for their homes. With tools like Zillow, we can become a nation of real estate voyeurs.

Thus, yesterday, the headline that one in five U.S. mortgage borrowers are underwater must have hit a nerve for all of us as we glumly assessed our declining net worth.

But, is this really a cause for panic? Only if you fall under the following categories:

You are voluntarily selling your home now or in the near future;
It is an investment property and it is cash flow negative;
Your creditors are involuntarily selling your home; and
You can’t make your mortgage payments (and why would you if the loan is now worth more than the collateral?)

In most other cases, the appraised value of your home being worth less than your mortgage is not a reason to give a quit claim deed to the bank or walk away from your mortgage. Your primary residence is where you seek shelter, raise your family, put down roots and grow old with loved ones.

It is an investment after those reasons.

Thus, a house being worth less than a mortgage is one of those facts that seems to have been given an apocalyptic meaning. It is certainly a sign of bad times and of the popping of the real estate bubble but it speaks more to a net worth issue than a cash flow consideration and we live day to day on cash and not on the impressiveness of our assets and liabilities.

I give the last word to Warren Buffet (courtesy of Michael James larger post on mortgage reform):

“Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.”

5 Comments on Mortgage worth more than your house?

By Michael James on March 6, 2009 at 7:16 am

Thanks for the mention. It’s hard to go wrong quoting Buffett.

By A Week in Review: Edition #2 | My Findependence Day on March 6, 2009 at 3:49 pm

[...] discusses home owners whose homes are worth less than their mortgage and remind people that a home is more than an investment [...]

By qmanrei on March 12, 2009 at 12:18 pm

In Canada – A concern is going to be those who have signed up for 40 year amortization and 100% financing with a short term mortgage. What happens when they go to renew and they can only amortize over 35 years and need 5% in the property?

By admin on March 12, 2009 at 1:58 pm

Qmanrei: Yes, that is a very good observation. Since people in the U.S. are already seeing this issue, it will be interesting to see how it plays out as a “script” for Canada in a few years.

By Ditech Home Loans on March 16, 2009 at 1:14 pm

The loss of home equity is not a good reason to default on your mortgage. If you had the ability to make your mortgage payments when you had equity, you should be able to make your payments without equity.