Seventy percent of the mortgage loans in Nevada have negative equity. 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 percentage of homes with negative equity is hard to believe. The real estate market in Nevada during the boom was too drastic, and their recovery is most painful. The national real estate market will see declines over the next year, how bad the declines will be will vary for Richmond Virginia Homes and Tooele Utah Real Estate.. It’s also not likely that home values will see any significant appreciation any time in the next five years.
Is there anything that can keep our property values from decreasing? How do we keep from having negative equity in a declinding market?
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. Right now, the interest rates on 15 year fixed mortgages are at all time lows, about 4%. Refinancing to a fifteen year loan will result in a higher monthly payment, but a lot more of the payment will go towards equity.
After the one year of paying off a fifteen year mortgage the principle is reduced by five percent. This would keep your equity percentage equal with a five percent market decline.
And, this was just the reduction in the first year. The pay off level compounds, and every year the rate of principle paid off increases. During year 5, the loan amount will be reduced 7.5%, during the tenth year equity is reduced 15%, and during year 14 it is reduced 50.6% and year 15, it will be reduced 100%. At this point, you will actually OWN the property. After fifteen years with a 30 year mortgage, the loan is only 30% paid off after fifteen years. 50% equity isn’t acheived until after the home owner has made payments for more than twenty years.
Over the last few years attitudes towards home purchases have clearly changed. Mortgage lenders used to recommend “no money down loans,” “option ARMS” and “interest only loans because real estate was an automatic investment. Now, the smart thing to do is to pay off the mortgage and eliminate the house payment altogether. Home owners with real equity are free to sell their house at any time, and don’t have to rely on bank appoval.