With the downturn in real estate values, you might be upside down on your mortgage like many other homeowners. This means you owe more on your mortgage than your property is worth. In some states where values have dropped as much as 50 percent, homeowners may be substantially underwater. This is particularly prevalent with anyone who bought a home with a mortgage near the top of the market, between 2005 and 2007. You also might be underwater if you refinanced your home back when lenders were doing loans as high as 100 percent loan-to-value. Here’s a typical scenario of a person who is upside down:

• Your current home value:                                                     $150,000
• Balance of your current home loan:                                      $250,000
• Monthly payments on $250,000 @ 5.5%:                               $ 1,419

**Monthly Payments if you bought a comparable home in the neighborhood

• Based on a current value:                                                      $150,000
• 20% down and a new loan of $120,000 @ 5.5%:               $  738

In this scenario, the homeowner is currently paying $1,419 per month when comparable homes are selling for $150,000 and a new loan of $120,000 would have a monthly payment of $738. This is a tough pill to swallow. It means the homeowner is paying $681 per month more than he would be paying if he bought a home at the current market value which is substantially less than what he originally paid for his property.

Here are six options to consider if you are upside down on your mortgage:

1. Walk Away From The Property: This of course will have serious repercussions on your credit and in some cases lenders can come after your personal assets if your home loan was written as a “recourse loan.” This means if the lender sells the property and takes a loss, they can come after you for any deficiency they incur. In some states like California, the only recourse the lender has if you walk away is to sell the property. Always contact an attorney before considering this option.
2. File Bankruptcy: Ultimately the lender will still get the property back even if you file for bankruptcy, however you can potentially avoid any deficiency judgment if the lender sells the property for less than the amount owed on the mortgage. A bankruptcy will also have a severe, negative impact on your credit report. If you’re considering bankruptcy, you might want to rent a home first, before you file the bankruptcy because landlords may be hesitant to lend to someone who is in the bankruptcy process.
3. Rent the Property: While values may have declined, rentals are still relatively strong. Check with your real estate broker to determine what homes in your neighborhood are renting for. You might be able to rent your property for what your current mortgage payment is. This option might buy you time until the value of your property comes back to its original value.
4. Do Nothing: In some cases you might want to stay in the home because the cost of relocating is prohibitive, and you simply “love your home.” When you consider the tax benefit you have by deducting the interest on your mortgage, you might find that moving to a lower price home may not be as attractive as you thought. Talk to your accountant and have him run numbers that compare your current situation with a potential new purchase so you can measure what the true after-tax benefit might be of staying in your current home.
5. Short-Sale: With this option, you sell your home for the balance owed on your mortgage. Your lender must agree to this, but in today’s market most lenders are willing to look at a short-sale option. An advantage of this method is that your credit stays intact.
6. Loan Modification: Loan modifications have become much more popular, because lenders will usually choose to renegotiate the terms of your mortgage rather than take the property back in foreclosure. With a loan modification, the lender agrees to restructure the balance you owe, as well as lower the interest rate to make the home more affordable. Lenders know that borrowers might consider walking from their property if their payments are substantially higher than the prevailing market cost.

All of the above options contain consequences that can affect your credit and net worth. It’s tough to pay hundreds of dollars more for a home than it’s actually worth, but you should weigh all of the consequences associated with each option before making a decision. This is why it’s so important to seek the advice of a qualified professional such as a CPA, attorney, or real estate broker.