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What Is An Upside-Down Mortgage?

What Is an Upside-Down Mortgage?

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When you buy a home, you hope the value will appreciate over time so you’ll be able to build equity. Of course, it doesn’t always work out that way.

Home values in neighborhoods can rise sharply for relatively simple reasons such as a major improvement in public transportation. Home values can also plummet.

These fluctuations can have serious financial repercussions—if you purchase before a drop, you could find yourself upside down on your mortgage.

Definition

An upside-down mortgage is simply a mortgage in which the owner owes more than the house is worth. If you can afford the monthly mortgage payments and don’t want to move, being upside down may not have an immediate effect. However, it will take longer to build equity in your home, which will affect your ability to refinance or sell your home and make a profit.

Fluctuation in home values

Volatility in neighborhood home values is the biggest cause of upside-down mortgage situations. Sometimes this instability benefits home buyers. When the housing market is strong, buyers can get a home at a relatively low price and sell it a few years later and make thousands of dollars in profit. The opposite is also true. A buyer who purchases a house at peak value stands to lose money when its value falls.

Nontraditional mortgages

Nontraditional mortgages—also called exotic or high-risk mortgages—can lead a homeowner into an upside-down mortgage situation or make it worse. Some mortgages allow interest-only payments for the first few years, which keeps payments low but doesn’t make a dent in the principal or build equity. Monthly payments on negative amortization mortgages don’t even cover the full interest costs. Instead, the interest payment is deferred and added to the principal. On these mortgages, a home buyer ends up owing more than the original loan. Homeowners in the first few years of these mortgages have little equity in their home.

Selling your home

Selling when you have an upside-down mortgage can be tricky. Buying or selling a home involves additional expenses such as closing costs, lawyer fees, and real estate agent fees. Some mortgages have prepayment penalties that actually charge the mortgage holder for paying off the mortgage before it comes to term. These fees and penalties add to the cost of selling a house, and increase the amount of money that you’ll owe when leaving your home.

If selling on your own isn’t an option and you’re falling behind on payments, some lenders will accept a short sale and forgive the difference between the amount of the sale and the total mortgage loan. However, this will damage your credit and may hurt your chances of qualifying for another home in the future.

The simplest solution for homeowners with upside-down mortgages is to continue making mortgage payments, if possible, and wait for home prices to rise again before selling their homes.

Updated from an earlier version by Dini Harris

Are You Moving? Tips To Make Your Move Easier!

4 Tips For Paring Down Your Stuff Prior to Moving

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If you’re planning a move, you may have an overwhelming urge to throw all your possessions into cardboard boxes, tape them shut and think, “I’ll deal with this after moving!”

We get it. But before you start dumping drawers into boxes willy-nilly, we implore you:Declutter first.

There’s no better time to get rid of unnecessary stuff than right before a move. You’re in the right mindset—you’re open to change.

Plus, you have to go though everything already, and if you follow through, you’ll start life at your new home with less junk and a stronger connection to the items you decided to hold onto before moving.

Sounds great, but how do you do it? We recently gave a best-selling book—“The Life-Changing Magic of Tidying Up,” by Marie Kondo—a read.

The book isn’t necessarily about moving; it’s more about how to live a less cluttered, happier life. But many of the suggestions Kondo offers are invaluable to those brave souls about to pack up their possessions and begin anew.

Here are four tips from Kondo’s book we found for downsizing before a move.

1. Category by Category

Think about your past attempts to tidy up or simplify your physical space. Odds are you went about it room by room. Rookie mistake!

Kondo subscribes to the theory you should instead go category by category. For example, if you keep some dinner plates in the kitchen and others in the dining room, put them all together in one place before going through them and deciding what to keep. Same for clothes, books, athletic equipment and so on throughout the house.

Don’t focus on what you’re discarding. Rather, focus on the things you are choosing to keep: This makes the process feel more positive.

2. Handle Everything

Kondo suggests touching everything you own in order to determine if you truly want and need it.

Take clothes, for example. Kondo believes it best to remove all your clothes from your closet and dresser, physically hold them and decide one-by-one if you want to keep each item.

You might be tempted to just flip through your shirts as they hang in your closet. According to Kondo, that’s a no-no. You have to get everything out of its place to determine if you want it—and if it truly brings you joy.

3. Find the Joy

This is a little touchy feely, but bear with us: Kondo believes that a possession either “sparks joy,” or it doesn’t.

It’s all about keeping the items that do offer that spark and getting rid of everything that doesn’t. Kondo uses books as an example: Does being surrounded by books you’ve never read bring you joy? Maybe not.

Of course, the standard doesn’t work for each and every item in a household. A plunger isn’t likely to “spark joy”—but having one around is still a good idea.

4. Make Moving an Event

Most people believe tidying is something you need to work at, something that requires upkeep. However, Kondo writes that if you’re constantly tidying up, you’re probably doing it wrong.

Instead of doing a little tidying up here and a little there whenever you have time, make your clean-up an event—something you spend a weekend doing with friends and family.

Painful? Maybe. But you’re more likely to experience a significant and long-lasting change. Of course, you’ll still need to put stuff away (unless you have a butler), but the effort will be minimal.

In short, think of Kondo’s method as a marathon that ends rather than daily sprints that go on and on and on.

———

Again, Kondo’s techniques aren’t specifically written for people undergoing moves. But there are few better times to assess whether you really need that old two-prong extension cord than when you’re holding it in your hand and have the option of packing it or chucking it.

You can check out Kondo’s book here or here.

Follow Mike Krumboltz on Twitter.

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