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2010-07-02 16:04:31

Don’t Worry About Your Upside Down Mortgage

Don’t Worry About Your Upside Down Mortgage

One of the most challenging concepts for housing consumers to understand is the notion of being “upside-down” in a mortgage.

Realistically, any buyer is upside down unless they get an incredible steal on a home, well under current market value.

If you buy at today’s market value, then one of two things has to happen for you to be rightside up, or owing less on your home than you can sell it for. You have to either pay down your mortgage for months or years until what you owe is lower than current market value, or you can passively wait for home values to rise higher than what you paid for your home, giving you instant equity.

Both methods take time, which is why you may be doing better than you think. 

In the housing boom of the previous decade, many people enjoyed instant equity, as home prices rose more than 5.8% a year. That’s beyond the “mean,” or what’s typical equity growth.

And when the mean is surpassed, the market tends to correct itself. For the first time in decades, homes lost value between 2006 and 2010. That’s also not normal.

Normal home appreciation, according to the mean, is about one to two percent annually after inflation, and we’re headed that way again.

That’s why home buying should be viewed as a long-term investment.

Are you really upside down?

You may not need to be worry about being upside down, because it’s normal to be upside down for a few years after buying a home. Here’s why.

By the time you buy and sell your home, you can incur up to 12% of your home’s value in transaction costs.

What that means is that as soon as you buy a home, you’re upside-down, and it could take as long as two to four years just to pay back the transaction costs of your loan and home purchase before you “break even.” That means selling at neither a loss nor a gain.

You may not want to wait years to build equity, but that’s how residential real estate has always worked.

The good news for you is that you may be able to combine both time and payments to build equity more quickly than you think.

Equity growth improves

According to business information service CoreLogic, the number of homes where borrowers owe more on the mortgage than the house is worth dropped to about 11.2 million in the first quarter, down from 11.3 million a year ago when “upside-down” homes were 24% of all homes with mortgages.

Now the negative equity rate is 23.7% or 11.3 out of 47.7 million mortgages.

Understandably, states with the greatest pendulum swing between rising and crashing home prices have the highest negative equity rates, such as Nevada, Arizona, Florida, Michigan and California.

But there are other states that missed the party and the hangover. Congratulations to Oklahoma, New York, Montana, Pennsylvania and North Dakota, for having the lowest negative equity rate in the U.S.

Top 10 metro areas with the highest negative equity rates:

1. Las Vegas-Paradise, Nev.: 74.7 percent
2. Phoenix-Mesa-Glendale, Ariz.: 57.5 percent
3. Orlando-Kissimmee-Sanford, Fla.: 55.1 percent
4. Riverside-San Bernardino-Ontario, Calif.: 53.5 percent
5. Fort Lauderdale-Pompano Beach-Deerfield Beach, Fla.: 53.1 percent
6. Miami-Miami Beach-Kendall, Fla.: 50.4 percent
7. Tampa-St. Petersburg-Clearwater, Fla.: 48.1 percent
8. Detroit-Livonia-Dearborn, Mich.: 46.8 percent
9. West Palm Beach-Boca Raton-Boynton Beach, Fla.: 45.3 percent
10. Sacramento-Arden-Arcade-Roseville, Calif.: 44.8 percent

Top 10 metro areas with the lowest negative equity rates:

1. Nassau-Suffolk, N.Y.: 5.4 percent
2. Pittsburgh, Pa.: 5.9 percent
3. Philadelphia, Pa.: 7.5 percent
4. Hartford-West Hartford-East Hartford, Conn.: 9.9 percent
5. Austin-Round Rock-San Marcos, Texas: 9.9 percent
6. San Francisco-San Mateo-Redwood City, Calif.: 9.9 percent
7. San Antonio-New Braunfels, Texas: 10.4 percent
8. New York-White Plains-Wayne, N.Y.-N.J.: 11 percent
9. Cambridge-Newton-Framingham, Mass.: 11.5 percent
10. Nashville-Davidson-Murfreesboro-Franklin, Tenn.: 11.5 percent

The bottom line is that you may be better off than you think as far as equity goes. If you’ve lost some equity due to the housing market’s fluctuations, try to be patient. Equity will return, sometimes slowly, sometimes quickly.

If you’re thinking of buying, but you’re scared of being upside down, don’t buy a home if you think you’ll be moving out of the area in the next five years or so.

The homeowners who stay in their homes the longest, build the most equity. It’s a fact.

Blanche Evans is CEO of
Evans Emedia, Inc. and publisher of The Evans Ezine. As an award-winning journalist, Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and twice recognized as one of the industry's most "Notables."   

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