I Owe More Than My House Is Worth.

Mortgages & Refinancing

I Owe More Than My House Is Worth.

A homeowner looks for ways to stay afloat.

When Michelle Jacobson bought a brand-new, three-bedroom house on an oversize lot in Northwest Las Vegas five years ago, she thought she had it made. The house, which had granite kitchen countertops and a casita for the kids, was in the right school district. It had walk-in closets. And although it was a bit pricey at $287,000, it looked like the perfect place for Jacobson to settle down with her husband and two children. "We thought, We can't lose," Jacobson recalls.

SEE ALSO: Refi Out of an Underwater Mortgage

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So the 37-year-old real estate agent and manager of apartment buildings planted some roots. She and her husband acquired an interest-only loan with a fixed rate of 5.875% from Countrywide. Then, they got to work on the upgrades -- a pool with a rock waterfall for $40,000, ceramic-tile floors for $6,000, and customized closets for $2,800.

When the house appraised for $500,000 just over three years ago, the improvements looked like a smart move. But that was then. Before long, the market turned -- big time. In fact, Nevada was the worst-hit state in the country thanks to a bubbly buildup of speculative condominiums and hotels. Home prices plummeted. Recently, says Jacobson, her house appraised for just $230,000. But her mortgage balance is $364,000, so the home she initially thought would be a good investment is instead underwater. As of the end of last year, 20% of all mortgages nationwide were in the same situation, according to First American CoreLogic, a Santa Ana, Cal., firm that analyzes real estate trends.


Jacobson's neighborhood is no longer as appealing as it once was, and she worries that her home's value won't bounce back when the market recovers. A lot of the homes in the community are foreclosures. What's more, the neighborhood is experiencing an increasing number of break-ins. Jacobson would like to move her family to the other side of the interstate, but they have few options. If they could sell the house for its appraised value, they'd owe the lender more than $130,000 -- money they don't have. They considered renting it out but nixed that idea because, in the current market, they'd be able to bring in only about $1,200 to $1,300 a month -- just over half of the monthly mortgage payment of $2,250.

Jacobson is worried about what a short sale (meaning the lender accepts a price that's less than the mortgage balance) or a voluntary foreclosure would do to her credit score, which is currently in the upper 700s. Plus, if she went to foreclosure, she and her husband wouldn't be able to buy another home for several years. On the other hand, if they stay in the house, they won't be able to pay back the loan in full after their ten-year interest-only loan comes to an end in four years. "We are in a desperate situation -- we could lose our house," says Jacobson.

Jacobson thought she could refinance her mortgage to get some wiggle room. Not a chance. Because their home is worth less than their loan, the refinance is considered high-risk. And when she called Countrywide to ask about modifying the terms of her loan, she was told she had to be three months behind on her mortgage payments to qualify. She's not -- and doesn't want to be.

The family's next step is to check with a HUD-certified housing counselor to see whether any options remain. But they might not be able to find relief from the Obama administration's housing program, which is likely to limit help for borrowers who are deeply underwater.



If you owe more on your mortgage than your house is worth, get in touch with your lender to see if you qualify for a loan modification. If that doesn't work, contact Hope Now for free assistance on how to prevent a foreclosure. A coalition of HUD-approved counseling agents, investors and mortgage companies, Hope Now will help you come up with a plan of attack. Another good resource is a HUD-approved housing counseling agency.

More homeowners will qualify for assistance under President Obama's "Making Home Affordable" plan. Details of the plan are still being nailed down, but it includes an option to refinance that you can use if your mortgage is backed by Fannie Mae or Freddie Mac. It also has a loan-modification program to help reduce payments. Under this program, the lender would reduce monthly payments and Uncle Sam would kick in funds to lower them further. The Treasury Department is setting up a new Web site to explain the program.


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