Advice for Underwater Homeowners in Financial Recovery

While the number of underwater homeowners has dropped considerably over the last few years, there are still hundreds of thousands of Americans who owe more on their mortgage than their homes are worth. And with the economy improving, a growing number of these underwater homeowners are finding themselves in better financial shape despite the status of their home loan. Some have even amassed enough savings to pay down their loan enough to bring the loan above water, but are unsure whether it would be better to pay down the principle on their current loan or sit on the cash to use as a down payment later on.

In most cases, the best option for an underwater homeowner is to hold on to excess cash, particularly if your cash stockpile is not enough to bring the balance under the home’s value. Should the cash not get you above water on the loan, it’s likely that you’ll eventually have to convince your lender to allow you to sell the home for less than what you owe, and that negotiation will be a lot easier if you have a lump sum of cash to offer. In addition, when a short sale ,occurs, the bank is essentially forgiving part of the loan, and the amount forgiven is considered taxable income by the IRS, so the money could be used for tax debts.

Of course, a short sale is generally considered a last resort move, only to be taken when other options are exhausted. The best bet for underwater homeowners is to get refinanced at a lower interest rate. This won’t get you out of your predicament immediately, but, with a lower rate, a bigger chunk of your payments will be applied to principal, meaning you will climb above the water faster. Regardless of what move you may be considering, however, it’s always a good idea to discuss your options with a mortgage professional. Explain your situation, plans and goals to them, and they can go through each of your viable options in detail.