I'm sure not many people have ever heard the term "negative equity". Let's discuss what it means to me.
I'm told, and from what I read quite frequently, that many people in states like Florida and California are finding themselves "upside down" in their mortgage. The term "upside down" means they owe more on their home than what it's worth because they paid an amount higher than what it's currently worth. Upside down sort of means you have "negative equity".
Positive equity, good. Negative equity, bad.
Being upside down isn't typically a problem unless the home owner has a rising "adjustable rate mortgage" or ARM. People in these states have found themselves upside down with an increasing adjustable rate mortgage. This combination is where the disaster lies.
As the ARM increases, the monthly payment increases. Eventually these home owners find themselves with a mortgage payment higher than what they can afford. So, they decide to refinance. Here lies a major problem. They can't refinance because they are upside down. The lender won't refinance because the house is worth less than the amount needed to refinance. Thus, the home owner has a high mortgage payment which they can't afford and may eventually face foreclosure.
Yesterdays post mentions a way to avoid foreclosure - the short sale.
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