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Recovering Home Equity: How Long Will It Take?

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Home equity has evaporated in America. According to an analysis by HSH.com, home equity for some underwater homeowners in the U.S. is unlikely to return before 2015. In some parts of the U.S., homeowners can expect to be underwater for even longer, given estimated price increases and mortgage repayment rates, but other areas have fared somewhat better. A look at data and calculations from several sources can give homeowners an idea of how much home equity they may have lost and how long it may take for them to recover it.

Five Worst Areas for Home Equity Recovery

A recently released study by research firm First American CoreLogic had some ominous news for those living in Detroit, Mich., Las Vegas, Nev., Lancaster, Pa., Fort Myers, Fla. and Pittsburgh, Pa. According to their housing price data and mortgage amortization calculations, an underwater homeowner in these areas can expect to remain that way until 2019.

Brighter Spots

Some parts of the country missed out on the housing boom and have consequently dodged the housing bust as a result. Since buyers didn't overpay for homes a couple of years ago, they aren't underwater today. If you live in Montana, North Dakota, Nebraska, Iowa, Oklahoma, Indiana, Kentucky, Alabama, Hawaii, or New York, the odds are better that you don't have a negative equity problem. (The Wall Street Journal has a state-by-state interactive table showing data on underwater mortgages.) The same goes if you're in Vermont (for which the Journal had no equity data available), West Virginia or Wyoming -- these states have some of the lowest foreclosure rates in the country, according to RealtyTrac.

How Fast Can You Recover?

The researchers at First American CoreLogic put together a formula that anyone can use to determine how soon they'll be out of the red and into the black. They assumed that nationwide, homes will appreciate at a 3% rate annually and that mortgages are paid down at a rate of approximately 3.3% annually. But you can be more precise:

  1. Using HSH.com's mortgage amortization calculator, you can input your exact loan parameters and see what your balance will be at the end of each year.
  2. Take your home's value today and multiply this figure by 1.03. Compare the value with your expected mortgage balance a year from now. If the loan balance is higher than the home's value, do this calculation again: take the new property value and multiply it again by 1.03. Check your amortization schedule and compare your mortgage balance at the end of year two with your property value at the end of year two.
  3. Keep doing this until you find the year in which your property value exceeds your loan balance. That's an estimate of when you will be above water.

(If you'd like, you can do this calculation with more refined assumptions about future home appreciation. That's what the HSH.com team did recently for Lew Sichelman at MarketWatch.)

If You Don't Qualify for a Loan Modification and Are Underwater

Of course, a mortgage modification, even one that involves an interest rate reduction rather than a principal reduction, can make it easier to see this dip in home prices through and get back on track. But what if you can't get approved and you owe more than your property's worth?

Some experts advocate strategic defaults -- letting the home fall to foreclosure even if you can make payments -- for those so hopelessly underwater that paying their mortgage jeopardizes their retirement prospects, their kids' chances of going to college or their ability to stay in business. The idea these pros espouse is that the choice to walk away is a business decision, the same kind of choice made by thousands of corporations each day.

Strategic Default Can Haunt You

However, this kind of "business decision" has implications. Financial expert Gerri Detweiler says that a foreclosure, which can stay on your credit report for seven years, could cut your credit score by 200 points. A strategic default could even jeopardize your current employment or your next job search.

In addition, in many states, mortgage lenders can come after you, or certain assets that you own, for what you haven't paid back (called a deficiency). In some cases, they can do this years later, when your finances are healthy and you think a bad episode is behind you.

Finally, if you need credit to run your business, buy your next home or get student loans for your kids, you may find yourself out of luck. Check with a qualified finance advisor and perhaps a lawyer before making this kind of decision. It should not be taken lightly.

About the author:

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

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