Owing more on your house than it is worth?

Question

Ive read versions of this phrase in several newspapers, and online at yahoo. Most having to do with the "mortgage crisis" and foreclosures. What does it mean? Of course you are going to owe more than your house is worth, the minute you agree to pay a mortgage you will be paying off double what you just borrowed in interesnt over the next 20-30 years or so. I dont get it.

Answer 1

What happens is that the housing market is bad, and instead of continuing to rise in value, homes are declining.  Therefore your home is worth less than when you bought it.  AND this is a problem if you put down 0% or 3% to purchase it.  And when you put down such a small (or no) down payment, you are paying interest and more interest for the first 15 years of your 30 year loan, NOT building up much equity and not very quickly.  That's why extra principal payments in your first 5-10 years of mortgage can have a HUGE impact over the life of the loan.

Normally you don't owe more than your house is woth the minute you close.  You have agreed to pay what your house is worth, less the down payment you already paid, plus interest until you pay off the money you borrow.  If your home declines in value, they you owe MORE than your home is worth, can't refinance if you have no equity, and will be paying MORE than your home is worth in addition to paying all that interest which doubles the amount you're paying over time.

Answer 2

It means the house you bought is now worth less then the value of your mortgage or mortages.  Many people bought houses for say $400000 and now the house is worth $350000 but they still owe 395000.

Answer 3

Technically you don't owe the interest.  That gets added on as time passes.  Some mortgages have a clause that you pay a penalty if you pay off early so you might include that.  The problem is that the value of the home has gone down since the purchase was made due to a flooded market of foreclosures.  The foreclosed homes have to be sold below their market value to get them sold quickly and thus the other homes lose value as well due to comparison pricing.

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Answer 4

When you see I owe more than it’s worth, it literally means they cannot sell their home for as much as they would need to pay off their loan. They bought at the peak of property values, and values have been correcting lately.  

Housing prices aren’t like car prices where they’re arbitrarily set. Instead, they’re dictated by market conditions; primarily supply & demand and buyer’s ability to pay.  What happened is that over the last several years, lenders got lax and approved people who normally wouldn’t get loans; they approved loans without proof of income; and offered loans where buyers paid only interest for a fixed amount of time. The payments would later increase (a problem if the interest only payment is all you can afford) and while they were paying only interest, they weren’t knocking down principal at all.

Having more buyers meant a higher demand for housing. In some markets, this meant real estate prices would sometimes increase 10-20% in a year when 2% is a normal increase. Obviously if 2% is normal, you can’t sustain 10x that for long.

Buyers & owners aren’t blameless either. They chose to take out loans that were the max they could afford and at the top of the market; lots of people took out second loans or refinanced their loans to cash out equity.  Many times, we’re talking about adjustable rate or interest only loans. So when rates reset or the interest only period ended, these people couldn’t keep up with payments. And since they had no equity, they couldn’t afford to sell.

So when you have unsustainable increases in value coupled with tighter lending standards and people desperately needing to sell homes they can’t afford, you get a volatile combination. Market values had to drop to offset the unnatural increases in value in some area. Tighter lending standards now mean less available credit so the ratio of qualified buyers of available homes is far less than it was a couple of years ago. This means lower demand and lower prices.  Since prices are going down, people who can’t keep up with payments on houses bought a the peak of prices can’t sell their homes for as much as they owe. If they’re already struggling it’s unlikely they can pay the difference in cash. So the options are, get your bank to take less (hard) or let your lender foreclose.

Answer 5

It means that it would take more to pay off your mortgage balance today than your house is worth today.  It has nothing to do with how much interest you will pay over the next 20 - 30 years.  Some people have borrowed 100% or more of the value of their property and now property values have fallen.  So, let's say a person has a first mortgage and a second mortgage or home equity loan.  Together it would take $275,000 to pay them off.  The value of their house has fallen because of what's going on in the housing market with foreclosures, etc. and their house will now only appraise for $215,000.  They now owe more than their house is worth.  When they got the loans their house was probably worth closer to $300,000 but values have fallen.  It's not a matter of how much you will have paid at the end of your mortgage but how much you could sell your house for now.

Answer 6

People owe more than it's worth by borrowing 100% (or close to it) of the purchase price and then seeing the market value decline.  It has nothing to do with the loan interest rate.