What if you're upside down in your home?

3) Stay in the current condo, and manage as best they can. This is obviously not the most desirable option, but it may be the best and the most economically feasible. At the end of the day, if John and Sandy cannot afford to pay off the negative equity balance (not to mention have a down payment for a new home, and qualify for a new loan in today's much more restrictive lending environment), then this is really the only option available. Of course, it's obviously not what John and Sandy want, but sometimes the best possible advice is for someone to just sit tight, keep making payments and saving, and wait for a better opportunity down the road.

I do NOT recommend for John and Sandy to simply try to abandon their current home to the lender since it's underwater. Doing so can destroy their credit rating, and may make it almost impossible to get a new loan for many years into the future. If they were to go down this road, it would virtually guarantee that they will not be able to get a new loan for a new larger home. It is hoped, it's not even a consideration, but with more stories arising of people trying to get out of their negative equity position by "just mailing the keys to the lender," I think it's worth noting that this is NOT a recommended course of action.

Advice from Mari Adam, CFP, MBA, CRPC

Adam Financial Associates
Boca Raton, Fla.

John and Sandy have what is becoming a very common problem in our area -- negative equity in their real estate. This is really a time to keep your head screwed on straight and think rationally through the options. Otherwise you can get yourself in big trouble.

This does not mean that they are insolvent (e.g., they are not in the same category as people facing foreclosure), but it does limit their real estate options.

Their goal is to upgrade to a larger, more family-friendly property. Depending on their personal circumstances, they'll have a few different options.


1) They can stay in the unit and not upgrade. This is the easiest solution but comes at the price of not achieving their goals. They have an adjustable mortgage, but the rate is reasonable and it does not adjust for a few more years. That gives them time to save more money, pay down the mortgage, and wait for the real estate market to improve.

2) Try to sell the unit and move. This will be hard because they cannot do a short sale (it would damage their credit and prevent them from buying again). So, if they sell, they need to pay off their mortgage. This may involve a bigger loss than they can afford.

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