Home Values and Loan Terms Play Role in Choosing a Mortgage Loan

When shopping for a home loan, consider the role of home value trends and mortgage terms. Understanding how mortgage loan terms can impact home values can be very useful in selecting a mortgage that matches your lifestyle and future plans. For homeowners who plan to sell in a couple of years, an option adjustable rate mortgage (ARM) with a low initial monthly payment and no prepayment penalty could be a great choice. However, this type of financing may not work for those buying a home that they plan to keep for the foreseeable future. The reason for this is that option ARM loans with very low initial payments add deferred interest amounts to the mortgage balance. This means the amount owed can increase rather than decrease.  In this scenario, if home values significantly decline, the mortgage balance may exceed home value. This situation is called "negative equity," and means that selling a home at market value will not pay off the mortgage loan(s) against it.

Upside down Mortgage Loans and Home Worth

Homeowners who find that their mortgage balances exceed their home worth should contact their mortgage lenders immediately. Mortgage lenders do not profit from foreclosure. They typically offer opportunities for refinancing or rewriting existing mortgage terms to help eliminate negative equity. The key to these programs is establishing the existence of negative equity by getting an estimate of home value from a local real estate professional. If your lender agrees to provide a loan workout program, it may require an appraisal to determine home worth. You may be asked to pay for estimates of home worth and/or pay a fee for changing the terms of your loan. Generally, the cost of modifying mortgage terms is less than conventional refinancing.

Mortgage Companies and Homeowners Working Together

Negative equity situations do not serve the interests of homeowners or their mortgage lenders. Rather than risk the consequences of a foreclosure, homeowners can often keep their homes while getting better loan terms if they work with their lenders. Loan workout programs may require a cash contribution from homeowners to offset the cost of rewriting and recording mortgage documents, but this can be worth it when compared to the cost of a lower credit rating and foreclosure. Homeowners who are concerned about negative equity should contact their mortgage companies to discuss available options for stabilizing payments and eliminating negative amortization features of their mortgage loans.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.