Is Your Home Worth Less Than Your Loan?
Friday, October 27th, 2006The last five years saw an enormous boom in the home equity loan and mortgage lending market. The main reason was that investors sought to build equity in the rising real estate market. There have been benefits, like increased homeownership from this boom. However, it’s not been all smooth sailing.
Home prices have been rising steadily during the last five years. The increase in real estate speculation has helped drive prices to record levels. This, combined with low growth in jobs and salaries, has made many markets unaffordable. The worst was Santa Barbara, California, which was overvalued by nearly 70%.
The huge overvaluation has forced the hands of many buyers, leading them towards dangerous interest-only loans and other risky loans, such as the Option ARM. These loans, which still leave the owners with huge monthly payments, generally do not help reduce the principal of the loan.