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Underwater? Find out when you won’t be

Is your mortgage underwater? If so, you're far from alone.

Millions of borrowers have become victims of bad loan decisions, excessive leverage or adverse market conditions which fostered the collapse in home prices. Yet, more than anything else, most underwater homeowners are victims of unfortunate timing, having purchased homes at or near the peak of prices. Furthermore, with home prices still weak in almost all markets, the underwater sinkhole threatens to swallow even more homeowners.

This week, Fannie Mae and Freddie Mac will begin processing applications for the expanded HARP 2.0 program—the federal refinance effort designed for homeowners, no matter how underwater they are. Yet even if you are eligible to refinance under the expanded HARP 2.0 program, the reality is that are you'll still likely to be underwater for some time to come. The question is “how long?”

To answer that question, HSH.com has designed two new and unique mortgage calculators that can tell you when your home and mortgage will no longer be underwater and how prepaying and price appreciation will speed up that process.

Hitting your equity goal

Do you want to have a given equity stake in your home by a certain date in the future—like by the time you retire, before an expected move or the start of your child's college education? Many homeowners do. Home equity is an important component of your financial plans, and having none can be a real problem.

If you want to know when your equity will return and how you can make it happen, HSH.com’s “KnowEquity” calculators can help you. These calculators will tell you the combination of amortization, prepayment and market appreciation you'll need to see in order to hit your equity goal.

The “KnowEquity When” and “KnowEquity How” calculators allow you to plug in your exact scenario to see when you'll be back in the black.

Getting your mortgage above water depends on the three factors mentioned above:

  1. Amortization: The continued payment of your mortgage
  2. Appreciation: How quickly home prices recover in your area
  3. Prepayment: Any additional mortgage payments you can make

It is the intersection of these three factors that will tell you the exact date your home equity will return. Stronger home price appreciation or greater prepayments will speed up your time to solvency, while amortization alone will take the longest.

‘KnowEquity When’ calculator

To use the “KnowEquity When” calculator, plug in your initial loan amount, term, mortgage rate, the date of your first payment, and what you think is the current value of your home, and the calculator will show you when you'll be back to a zero equity level.

If you can afford to pay your loan down more quickly, add in some regular monthly prepayments and see how much that speeds up the time, or even mix in some expected home price appreciation (anything from a fraction of a percent to 5 percent per year) to see how fast you can get back to breakeven.

Hoping to sell without having to pay cash out of pocket to make it happen?

The “KnowEquity When” calculator also conveniently calculates when you'll hit the typical 6 percent equity stake needed to cover sales commissions so you'll walk away cleanly.

We encourage you to use the “KnowEquity When” calculator to enter your own scenario to see when your home will no longer be underwater.

‘KnowEquity How’ calculator

If you have a specific date in mind when you want or need to be back above water, you should try HSH.com’s “KnowEquity How” calculator.

The “KnowEquity How” calculator is designed to tell you how much amortization, appreciation and prepayment you'll need to get to your goal of positive equity on a specific date.

Let’s say your goal is to sell your home for the market price in five years with enough equity to cover all costs. Or, let’s say you want to know when you will fully recover the price you paid for your home. What sort of market conditions and additional payments will it take for you to get where you want to go or need to be?

A time frame that is considerably shorter than the full term of your mortgage will require a boost in home prices or an additional commitment of prepayment. But how much? There are many potential intersections of these two factors--appreciation and prepayment--and the “KnowEquity How” calculator will show you a number of possibilities that can help you to achieve your goal.

While the “KnowEquity How” calculator will give you a result to fit your desired time frame, you may want to tweak them to specify a given level of appreciation or the amount of prepayment you can or want to make.

HARP 2.0 has made refinancing your underwater mortgage possible, but it won’t change the fact that you’re still underwater. At least now you’ll know when you won’t be.

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About the author:

KTGA 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.

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