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How Did These Homeowners Survive Their Underwater Mortgage?

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In May 2005, Julia and Todd R. felt like the luckiest people in the world. Thanks to a friend who worked for a mortgage company, they’d been able to iron out a deal that would allow them to purchase their new home in Cincinnati, OH. Julia, Todd and their two young daughters were looking forward to living out the American dream in their forever home.

But within months, Julia realized they’d made a huge mistake. They’d bought their home with no money down, and the “deal” their mortgage broker friend helped sign them up for was an interest-only, adjustable-rate 80/20 mortgage for 100% of the home’s purchase price. That means they actually had two mortgages—one for 80% of the home’s cost and the other for 20%.

As soon as they realized their error, Julia set out to correct it. “I called the mortgage company to try to refinance to a fixed mortgage,” she told us. “But they said they couldn’t refinance our first mortgage because we didn’t have enough equity.”

That’s When Things Went Terribly Wrong

Julia and Todd were caught in a perfect storm of bad choices and devastating economic fluctuations. They’d bought their $190,000 home just as home values peaked in the Cincinnati housing market. By the time they tried to refinance out of their terrible loan, home values in their area had already started to fall. Not only did Julia and Todd have an expensive loan, they were also joining the ranks of other homeowners who now had underwater mortgages, meaning they owed more for the home than they could sell it for.

Nationwide, the mortgage meltdown was also picking up speed. Lenders finally realized that approving super-complicated, interest-only loans for people who couldn’t really afford a home was actually risky business. Banks tightened their lending requirements and were no longer interested in helping new homeowners like Todd and Julia work out a solution.

“I started the application process with four different banks,” she said. “It was incredibly discouraging and frustrating being turned down for a refinance over and over. We were stuck.”

They didn’t qualify for government mortgage relief programs, so they were left with just one option: “We just kept paying anything we could to our mortgage and prayed that home values would start to rebound,” Julia said.

It was a long wait. “Home values plunged, and we got more and more underwater,” Julia said. They were in the same shape as nearly one-third of U.S. homeowners who were also struggling with an underwater mortgage. At one point, Julia and Todd’s home was valued at $40,000 less than what they’d paid for it.


Treading Water and Refusing to Give Up

Years passed, and the weight of the mortgage grew heavier as their home’s value dropped. “We never missed a payment, although some months we were definitely stretched,” Julia told us. She often lay awake at night, worried they might lose their home. “If we lost our jobs, losing our home was definitely a possibility.”

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Many homeowners in similar situations made the decision to walk away from their homes and allow their lenders to foreclose. Some defaulted because they truly couldn’t afford to make their payments, while others did it because they no longer wanted to pay for an asset that was losing value. Still others opted for short sales and sold their homes for less than they owed in order to avoid foreclosure.

But Julia and Todd never considered walking away from their mortgage. “Foreclosure or short sale were not an option,” she said. “This is our home—we love it and we were willing to fight for it.”

Fighting to Win

In 2008, Julia and Todd signed up for a Financial Peace University (FPU) class at their church, and there they finally found a way to truly fight for their home.

“We dove into the Baby Steps wholeheartedly,” Julia said. “We changed to all-cash envelopes, cut up our credit cards and paid off all debts except for our mortgage,” Julia said. “We paid off $49,000 in consumer debt, and it took us exactly 20 months.”

Once the debt was gone, she and Todd tackled their emergency fund then attacked their mortgage. “We started putting all the money we could into our mortgage,” she explained. “Our goal was to pay off the second mortgage then get the first mortgage paid down enough that we could refinance.”

For the next few years, they focused on this one goal. “We made a lot of sacrifices, and with the budgeting, saving and behavior changes we learned from FPU, we knew we would save our home and get above water and breathe again,” Julia said.

This time, their good choices and favorable market conditions would conspire in Todd and Julia’s favor. As they paid down their mortgage balances, home values slowly began to climb. This year, they reached their goal and finally refinanced into a 15-year, fixed mortgage. “We are so happy!” Julia said. “We can’t wait to get the mortgage paid off, but it is such a great relief to be out of that ARM!”

Not only do Todd and Julia now have a mortgage they can handle, their loan is no longer under water. “Our home appraised for $165,000 when we refinanced this spring,” Julia said. “We owe $150,000, so we have $15,000 equity now!”

Turning the Corner Nationwide

Across the nation, other homeowners like Todd and Julia are finally feeling the housing turnaround. According to RealtyTrac’s “U.S. Home Equity & Underwater Report,” the number of homeowners with negative equity was at its lowest level since 2012. Even better news is that another 8.5 million properties are on the verge of breaking even. That represents 16% of all properties with a mortgage.

Julia and Todd understand the anxiety these homeowners feel. “When we had debt and an underwater mortgage, we worried constantly,” Julia said. “But once we paid off our other debt, it seemed like less of a burden, and we were certainly more optimistic that we would make it and finally get refinanced.”

“My advice to anyone dealing with an underwater mortgage is to take a hard look at their finances and budgets,” she added. “Budget, stick to your budget and put every extra dollar toward the principal of your home.”

That’s a voice of experience homeowners who are still waiting for their mortgages to come up for air can trust.

Get Answers and Hold on to Hope

Of course, not all underwater homeowners are in the same shape. Some 9 million properties are still seriously underwater, meaning their mortgage balances are at least 25% higher than the properties’ estimated market value.

If you’re one of these homeowners, you’re probably ready to do something—anything—to get out of your mortgage. But you shouldn’t make any decisions without all the facts. Start by talking with a real estate agent you trust who will help you determine your home’s true market value and talk with you about the state of the housing recovery in your area.

An agent with the heart of a teacher will educate you about your options so you can make the right choice for you and your family. If you’d like to talk with an agent who has the experience and knowledge to give you the advice you need, we can put you in touch with one Dave recommends in your area today.