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Upside Down Mortgage Definition It’s super easy to learn how to calculate upside down mortgages with our free online upside down mortgage calculator. Those who are homeowners that still have a mortgage are facing a challenge only few saw coming. Getting upside down on their mortgage was inconceivable until the start of 2007-2008. With the housing bubble caused by the subprime mortgage crisis people who had mortgages they couldn’t afford ended up with their homes being foreclosed upon and put up for auction. This happens from time to time however when this perfect storm hit there was a glut of houses put up for auction. During this time it was a buyers’ market and homes begun losing value as the potential resale prices continued to drop. Many homeowners where responsible and did not buy more house than they could afford however this financial quagmire is pulling them down. For those who are not familiar with what upside down means we will explain. What is an Upside Down Mortgage Whenever some purchases a property they cannot buy totally with cash and almost no one can do this , they require a mortgage. A mortgage is a legal contract where a lender provides funds to purchase the home. Most lenders will not provide one hundred percent of the purchase price so a buyer will need to come up with a down payment ranging from five to twenty percent. The reason lenders want some down payment is to limit their risk. When a person does have a mortgage they pledge the house as collateral in the event the borrower defaults and does not pay the loan the lender can take ownership and sell it to cover their loss. Where things get complicated is the value of the house is based not on it alone but on the housing market in that area and what comparable houses are selling for. Let’s use an example we have John who bought a house that was worth four hundred thousand dollars and had a mortgage for three hundred and eighty thousand dollars. The home was appraised at four hundred thousand dollars. Flash forward to right now that same house is now worth only two hundred thousand dollars and the mortgage is still four hundred thousand. If the bank were to sell the house they would be at a substantial loss and if John continues paying the mortgage he is paying for something that is not worth what they original agreement was based upon. This is known as negative equity or the street term upside down, this situation is compounded by homeowners who are walking away from these mortgages and opting to rent. This presents quite a difficult decision, does John continue paying the mortgage and hope property prices climb back to pre-financial crisis levels or walk away from the home? Both have serious consequences so it should not be done lightly. There is a moral challenge where a person must accept the responsibility of their decisions whether or not they are at fault for the outcome. Making A Choice In order to make a truly informed decision John and many others like him must first figure out how far upside down they are and this is achieve by using an upside down mortgage calculator. By plugging the numbers into the calculator the true scale of the issue is present. When forecasting using a more conservative rate of appreciation for the property will reduce the likely hood of any shocks down the road. Even the best laid plans have some margin of error involved. If you are underwater on your mortgage seeking out legal advice and financial advice on your options may be very beneficial. Also reaching out to your current lender and discussion options to modify your mortgage may be an item of consideration. Lenders are cognizant of the fact that many people are walking away totally from their obligations so the fact that you are willing to try and works things out speaks volumes about your character. Be sure to check out the Reverse Mortgage, Maximum Mortgage, and Mortgage Points calculator. How to Calculate Upside Down Mortgage Let's be honest - sometimes the best upside down mortgage calculator is the one that is easy to use and doesn't require us to even know what the upside down mortgage formula is in the first place! But if you want to know the exact formula for calculating upside down mortgage then please check out the "Formula" box above. |