Severely Underwater Mortgages Are Declining In The US

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The recession of 2008 left some deep scars on the American economy. Unemployment soared, businesses closed, and stocks tumbled. It was a dark time in our financial history.

One other impact of the Great Recession that we continue to deal with today was a sharp drop in home prices. This caused many Americans to become “underwater” on their home loans, which means that they owed more on their mortgages than their homes were worth.

The good news is that severely underwater mortgages are declining; read on for more information about this positive economic news.

2013 treated homeowners well

According to CNN Money, which reported on data from RealtyTrac, 19% of homeowners in the U.S. are “deeply underwater” on their home loans, down from 26% at this time last year. “Deeply underwater” is defined as owing at least 25% more on your mortgage than the amount your home is valued at.

The decline in homes that are seriously underwater is due to an up-tick in home prices in 2013. Between January and October of last year, home values rose by an average of 14%. A rise in values means that the gap between what borrowers owe and what their homes are worth narrowed, causing “deeply underwater” mortgages to decline.

Fewer homes underwater means fewer foreclosures

Economists like to see fewer homeowners underwater on their mortgages because this means it’s less likely that those borrowers will resort to foreclosure. Foreclosures do serious damage to a person’s credit, making it difficult for them to get another loan.

Foreclosures are not only bad for the homeowner, they’re bad for the overall housing market. This is why real estate experts like to see borrowers emerging from the depths of negative equity; some may even cross into positive territory in 2014.

We’re not out of the woods yet

While it’s encouraging to see declines in mortgages that are seriously underwater, it’s important to remember that many Americans are still facing a big financial problem if they need to sell their homes. Nevada, Michigan, Illinois, and Florida each have “deeply underwater” mortgage rates of over 30%, with Nevada having the highest percentage in the nation at 38%.

The implications of this are sweeping: that over one-third of homeowners in these states are unable to take advantage of historically low interest rates to refinance their existing mortgages, and if they want to sell their homes, they’ll have to bring a lot of money to the table. All this means that we’re not out of the woods yet!

About Lindsay Meredith

Lindsay is a high school teacher and personal finance blogger. She lives, works, and plays in the Washington, D.C. area.

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