How to Keep From Having an Underwater Mortgage

I read an article this morning that 70% of the home loans in Nevada are under water, meaning that more than two out of every three homeowners in the state of Nevada owes more on their home than it is worth. These people are unable to sell their homes unless they have a huge savings or can qualify for a short sale.

This stat is pretty staggering really. Nevada’s real estate market was out of control and they are now suffering the consequences. With the way things are headed in both the national and local real estate market, it’s possible that Logan Real Estate values will decrease.

Is there a way to prevent values from declining? Is there something we can do about it? Well… we can’t really control the external factors associated with the real estate market, the federal government has already tried that, but we can control the amount we owe on our mortgages. 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 15 year fixed mortgage. Right now, the interest rates on 15 year fixed mortgages are at all time lows, about 4%. I’m currently in the process of refinancing a property, and am amazed at how quickly principle is reduced with these loan products.  By refinancing, my monthly payment will go up by about $180, but my principal amount will be reduced by an ADDITIONAL $468 in just the first month, and will increase every single month.

In just one year with a 15 year fixed mortgage my principal will be reduced by nearly 5%. So, if the real estate market were to drop 5% in value over the year, my equity percentage would have kept pace.

But, the amazing thing about amortization is that the amount, and rate, of principle payed off increases every year.  During year 5, my mortgage will be reduced 7.5%, year 10, a reduction of 15%, year 14, 50.6% and year 15, it will be reduced 100%. At that point I can say that I actually own the property. With a 30 year fixed mortgage, at the 15 year mark the loan is only 30% paid off. An owner doesn’t achieve 50% equity until year 20.

The attitude towards real estate investments has definitely changed in the five years I’ve been in the business. Five years ago the advice was to borrow with as little as possible to “leverage” your real estate investment, because the value will always increase. Now, the wise decision is to pay your mortgage loan down so one day you can be mortgage free, and actually own an asset. By paying down your mortgage, you are also in position that you can sell if you need too, and if you want to.

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