If you owe more on your home than it's worth-in other words, if you have negative equity or are "upside down" in your mortgage-there may still be hope for solving your problem. The options require sacrifice, but could potentially help you avoid greater financial woes.

Approximately 20 percent of all mortgages in the nation now have negative equity. If home prices continue to fall, that number could go as high as 25 or 30 percent. As job losses increase, it becomes increasingly harder for homeowners to make their mortgage payments, and harder for them to justify paying for houses that have severe negative equity.

Negative equity solutions

Should you find yourself upside down on your mortgage, here are three possible scenarios to fight back and remedy the situation:

  • Slash your asking price enough to attract a buyer, and negotiate with the lender to accept the price, even if it doesn't cover the entire mortgage balance. This kind of so-called "short sale" requires sacrifice, but may help you to avoid foreclosure.
  • If you have good enough credit, you can sell the home that's under water and use the proceeds and a new loan to buy a smaller and more affordable property.
  • If possible, try to drastically cut back on living expenses in order to stay put, and keep making your mortgage payments. Even if it requires extreme austerity, it may help you keep your home. Once the economy regains its traction, you can resume a normal lifestyle, and your home will likely gain back much, if not all, of the value that it lost.

Help on way for upside-down mortgage

Many homeowners are giving up, mailing the keys back to the bank, and walking away, hoping to start over elsewhere. But help may be on the way for some, just in the nick of time. J.P. Morgan, for example, said that it will modify thousands of mortgages to make them more affordable and manageable. The company inherited $54 billion in troubled loans this year by taking over failed Washington Mutual. Meanwhile, Bank of America, which bought Countrywide Financial a few months ago, has launched a major loan modification program, targeting those who have a home under water. Before being acquired, Countrywide handled about one out of every seven home loans in the U.S., so steps by the bank to help those who are upside-down on mortgages could have a widespread positive impact.

Fannie Mae and Freddie Mac have also recently announced a multi-billion dollar plan to do loan modifications. Some of the innovative measures that they're now taking to help homeowners who have loans under water include lowering monthly payments through 40-year amortization, cutting principal balances, and lowering interest rates to 3 percent. With this kind of drastic and aggressive action, many of these homes may now be rescued before it's too late.

Published on December 8, 2008