Nearly one in every four homes in the United States has an “Under Water” mortgage, meaning the homeowner owes more than the property is worth. The number of underwater homes in Florida and Arizona are also pretty dismal. Underwater homeowners 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. The real estate market in Nevada during the boom was too drastic, and their recovery is most painful. The way real estate trends are headed we will likely see real estate declines for Herriman UT Homes and Real Estate in Tooele Utah. It’s also not likely that home values will see any significant appreciation any time in the next five years.
Is there a way to prevent values from declining? Is there any way that we can prevent this from happening to us?
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 of the ways that you can easily reduce principle is with a 15 year fixed mortgage. Currently interest rates for 15 year mortgages are at historic lows. Refinancing to a fifteen year loan will result in a higher monthly payment, but a lot more of the payment will go towards equity.
In just the first year of a 15 year fixed mortgage loan, principle is reduced by nearly 5%. As long as real estate values didn’t increase by more than 5%, you would have increased in real equity.
But, this was JUST the reduction for the first year of the loan. The amazing thing about amortization is that the amount, and rate, of principle payed off increases every year. During year 5, the loan amount will be reduced 7.5%, year 10, a reduction of 15%, year 14, 50.6% and at the end of the fifteen year, is completely paid off. At this point, you will actually OWN the property. With 30 year mortgages, the owner still owes 70% of the original loan value after making payments for fifteen years. 50% equity isn’t acheived until after the home owner has made payments for more than twenty years.
People’s attitudes towards using homes as investments has drastically changed over the last few years. The so called real estate investment guru’s used to recommend buying with no money down because home values always increase and savings could be used for better investments. Now, the smart thing to do is to pay off the mortgage and eliminate the house payment altogether. By having more equity than market value, sellers aren’t chained to their current house and are free to move at any time.