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LTV: The Key to the Underwater Mortgage

Guest post by: Bud Gragg

Article Overview: If you're wondering whether or not you're in an underwater mortgage, the key is to understand your loan to value, or LTV, ratio. The LTV reflects how much you owe as a percentage of the total value of your house. So, for example, if you originally took out a $130,000 mortgage on a house that was appraised at $150,000, your LTV ratio would be 87%. In other words, you would then owe 87% of what the house was actually worth-a win for you once the mortgage was paid off, provided that the property value didn't change. Which, of course, never happens, does it?

LTV: The Key to the Underwater Mortgage

If you're wondering whether or not you're in an underwater mortgage, the key is to understand your loan to value, or LTV, ratio. The LTV reflects how much you owe as a percentage of the total value of your house.

So, for example, if you originally took out a $130,000 mortgage on a house that was appraised at $150,000, your LTV ratio would be 87%. In other words, you would then owe 87% of what the house was actually worth—a win for you once the mortgage was paid off, provided that the property value didn't change. Which, of course, never happens, does it?

Throughout the 1990s and the early part of the next decade, LTVs just kept getting better and better for homeowners because property values kept rising. Housing mortgages were rightfully seen as one of the best investments a family could make. After all, say you bought that $150,000 house with that $130,000 mortgage in 1990. In 2006, that same house might easily have been appraised at $200,000!

Now, let's say you had the income to pay off $65,000 of your mortgage in those 16 years and still owed $65,000. Your LTV would have improved to 32.5%!

And that kind of thing is exactly what happened for millions of homeowners throughout the United States. That's why home equity loans were so common—if your LTV was going to just keep improving, why not take out a home equity line of credit or even a second or third mortgage, right?

But what if housing values fall? Suddenly that LTV doesn't look very good anymore. That number keeps rising until your value is less than the amount you owe—and your mortgage is underwater.

That's what has already happened to 24% of US homeowners since the real estate bubble broke in 2007. Now, we could get into the story of why that happened to us—and we do elsewhere in our blog and on our website.

For the moment, though, we want you to concentrate on a different kind of LTV as you're considering your underwater mortgage. And this LTV stands for “Long Term View.”

Because if you're in an underwater mortgage, you've got some decisions to make, and these decisions will have some long-term implications. If you are near the end of your mortgage's term and/or if you are currently less than say 5%–10% underwater and if you can continue making mortgage payments, you may choose to stay in the house and ride things out.

Just don't count on property values rising any time soon. Things are going to get worse, and maybe much worse, on that count before they get better. You may never get your equity back!

But if you've only got 5 to 10 years left on your mortgage you've already put well over $100,000 into that investment. In that case, you need to decide if your mortgage is actually just an investment or if you're really planning on living in or renting out your house for a very long time. If your mortgage was just an investment, you may or may not decide to stop throwing good money after bad.

So what we suggest you do is to research your options. A short sale and a foreclosure have different benefits and different negatives to each of them. For one thing, a short sale at the very least delays a foreclosure while you're living in your house mortgage-payment free!

The other thing we strongly suggest is that you look at what to do about your underwater mortgage as a family business decision. Add up the numbers and act on those numbers and what they mean for your family.

Yes, you're going to have a lot of emotions about this—but don't let those emotions drive your decisions! That's where both kinds of LTV come in—looking at whether or not it's worthwhile to keep going with your underwater mortgage and taking the long view of what you really want for your family 10 and more years down the road!

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  What is an Underwater Mortgage?

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Re: Hi - Thanks guys! I have been helping Real Estate and Mortgage professionals generate leads from the Internet for 5 years now!. I'd be glad to exchange some ideas. Have a great day=)
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Re: Time to get rich in real estate? - [quote="OmnivoreInk":397sdq49]Another thing I'd do if I had a million bucks...or more... would be to start buying up distressed real estate. Sounds ghoulish, I know, but prices are down so much now that anyone who can afford to buy houses and hold onto them until the market "corrects" itself, could make a bundle in a few years. I've been reading a great deal about the current mortgage crisis, and I've got to say that whatever genius came up with the Adjustable Rate Mortgage - and worse, actually persuaded people to buy using it - deserves to be boiled in his own oil and buried with a spring of holly through his heart! What a ridiculous thing - just asking for trouble![/quote:397sdq49] I've gotten into a few loans that I didn't check the terms as thoroughly as I should have, but its hard to imagine someone signing deed of trust papers for that amount of money for 30 or so years and not understanding the terms. I would never want an adjustable mortgage - even before these latest problems, the financial system is unpredictable. Things can change A LOT in 30 years - look what happened in 4 or 5 years. Chris
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