TIME real estate

Nearly 10 Million Mortgaged Homes are Still Underwater

Mortgage Bankers Association To Release Weekly Mortgage Market Index June 12
A house for sale in LaSalle, Ill., June 7, 2013. Daniel Acker—Bloomberg /Getty Images

A new reports estimates some 18% of mortgaged homeowners are stuck with homes worth less than their debt, and that's an improvement over previous quarters

A collapse in housing prices has trapped nearly 10 million U.S. homeowners in homes worth less than their mortgages, according to a new report by real-estate price tracking website, Zillow.

The report estimates that in the first quarter of 2014, 18.8% of mortgaged homeowners were stuck in homes that would sell at a loss. That marks an improvement over the final quarter of last year when 19.4% of home mortgages were underwater and a significant improvement over the 2012 high of 31.4% — but still leaves nearly 10 million households struggling in negative equity.

The report estimates that another 10 million homeowners have 20% or less equity on their homes, known as “effective negative equity” as homeowners can’t draw enough home equity to swallow the costs of selling the home and moving upmarket. Many home owners rely on home equity to fund the broker’s fees and meet the next home’s down payment.

Underwater borrowers threaten to leave a lingering chill in the housing market, the study’s authors concluded. “The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow Chief Economist Dr. Stan Humphries.

MONEY buying a home

Countdown to Buying Your First Home: Our Checklist

Get ready for one of the biggest financial moves you'll ever make: Buying your first home.

First-time home buyers have it tough. The supply of homes for sale is tight, and lenders are tightfisted.

Student debt, at an all-time high of nearly $30,000 per grad, is getting in the way of saving for a down payment, says David Stevens, president and CEO of the Mortgage Bankers Association. But it’s a great time to get your foot in the door.

“Interest rates remain the envy of even your grandparents,” says Keith Gumbinger, vice president of mortgage publisher HSH.com. First, make your finances sparkle.

THE TURNING-POINT CHECKLIST

12 months in advance

Make sure the time is right. Use Trulia.com’s rent or buy calculator to see if you’d really come out ahead, based on loan rates, taxes, and where rents and prices are headed in your area. Nationwide it’s 38% cheaper buying vs. renting.

Clean up your act. Devote this year to saving money and paying down debt. You’ll need at least 3.5% down for an FHA loan, or 10% to 20% for a conventional mortgage. Lenders also like to see job stability, so settle in for now.

Learn what you like. When a home catches your eye—a listing, say, or a photo—pin it to a board on Pinterest. Or try Swipe, a new app from the site Doorsteps, which lets you browse listing photos and mark them pass or save.

Six months out

Look better to lenders. To boost your credit score, order your free credit reports at annualcreditreport.com and fix any mistakes. Pay bills on time, chip away at credit card balances, avoid new debt, and don’t close any accounts or apply for new credit. The average credit score for approved mortgage applicants is 755.

Figure out what you can buy. Use an online calculator like the one at Zillow.com to estimate how much house you can afford based on your income, savings, and debts. That’ll help you research homes and drill down on costs.

Forecast future bills. With an idea of how big a house you can buy, you can do a more detailed budget. Scan listings for property taxes on homes you like. Get a homeowners insurance quote at Insweb.com. Call local utility companies for the typical bills. And tack on 1% of the home’s value for yearly maintenance.

Related: Baby on the Way? Time to Make a Budget.

Three months out

Pick your loan. Fixed mortgage rates, now 4.4%, may edge up to 5% this year, forecasts HSH.com. If you are confident this is a starter home, you can save with a 7/1 adjustable-rate loan, now 3.5%. The risk: You end up staying longer than seven years and rates rise sharply. Most—92% of mortgage borrowers—opt for fixed-rate loans.

Prove you’re a serious shopper. Based on your income and credit, a bank will give you a mortgage pre-qualification. “It’s the No. 1 thing you want in your back pocket when you go shopping,” says Svenja Gudell, an economist with Zillow.

Even better in a hot market: Pay a few hundred to go through underwriting upfront.

Find a guide. Look for a realtor who has worked in the neighborhood where you hope to live. And in a tight market like today’s, ask candidates what their strategies are for unearthing listings and handling potential bidding wars.

MONEY

Reverse Mortgage: Is It Too Risky?

Considering a reverse mortgage to drum up retirement cash? Don't tap your home's equity too hard. photo: adam voorhes

If you’re 62 or older, you’ve probably started getting reverse-mortgage solicitations in the mail, and it’s hard to miss the aging actors singing the loans’ praises on TV (hey, it’s the Fonz!).

The pitch may sound appealing, especially if you’re among the 83% of boomers who plan to stay in their home through retirement: Tap your home’s equity now and receive a monthly payment, line of credit, or lump sum, regardless of your credit score or income.

The mortgage will start accruing interest immediately, but you won’t need to pay back a dime until you move out or die — at which point you or your heirs must repay the bank in full.

Indeed, reverse mortgages can be a good option for seniors age 70 or older who are committed to staying in their homes and don’t have the savings to cover their expenses, says elder-law attorney Janet Colliton of West Chester, Pa.

However, she adds that recent trends are making the loans a riskier proposition. For one, borrowers are younger: Last year 47% were in their sixties, more than double the percentage from 2001. A growing number (69%) are also taking their payout in a lump sum rather than a steady stream. And reports say predatory lenders have been pushing these mortgages on folks who can’t afford them.

The result: Borrowers who take the loan too soon, or spend the payout too quickly, could end up without a source of equity to fall back on — and might even lose their homes.

If you or someone you love is thinking about a reverse mortgage, consider these questions. If you answer yes to even one, this type of loan is probably the wrong option for you.

Are you in your sixties?

You want to put off a reverse mortgage as long as possible. The amount you can borrow is based on the current interest rate (you can borrow more when it’s lower), your home equity, and the age of the younger spouse. The older he or she is, the more you get.

On a $300,000 house with a $100,000 mortgage, for instance, a 75-year-old might receive a $574 monthly payment, while a 65-year-old would get just $411. (See reversemortgage.org for a calculator.)

Related: Your Pension: Lump Sum or Lifetime Payments?

Younger borrowers also face more years of compound interest, which can quickly ratchet up the amount you owe.

There’s also a greater chance that you’ll run into unexpected medical bills or other expenses as you age, sapping your payout more quickly than you anticipated.

Will the costs be more than you can afford?

Reverse mortgages are a notoriously expensive way to tap equity.

For that borrower with the $300,000 home, fees would include $6,000 in upfront mortgage insurance, a $2,500 origination fee, and about $3,400 in traditional closing costs — and that’s before you get to the monthly mortgage insurance premium of 1.25% of the loan balance.

Plus, you’ll still need to cover regular housing expenses such as taxes and maintenance.

Don’t commit to the loan until you’ve met with an independent financial adviser to go over the total cost and discuss alternatives, says Steve Weisman, author of A Guide to Elder Planning.

Is there a better option?

Before turning to a reverse mortgage, homeowners should explore bolstering their finances by downsizing or working longer.

Those with good credit might also consider a traditional refinance or a home-equity line of credit (HELOC), where you draw only the funds you need and pay off interest as you go, says Waterford, Conn., financial planner Nancy Butler.

It’s also a good idea to get your heirs involved — particularly since they’ll be responsible for paying off (or selling your house to pay off) the loan after your death. They may be able to provide a private reverse mortgage or become a part owner of the house now.

Ultimately, people should think very carefully before draining their home equity, says Margot Saunders, counsel at the National Consumer Law Center: “Once it’s gone, it’s gone.”

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