If you read this question in Nevada Home, the black text is old news.  Scroll down to the blue text to see what the editor cut. . .

Well, as they say, “knowing is half the battle.” It is not just the folks that bought at the top of the market with 100% financing that are finding themselves in this bind nowadays.  Local homeowners that refinanced with the use of a less than conservative appraisal, originally financed or refinanced into a negative amortization (pick a payment) loan, or bought in a subdivision and opted for no feature upgrades (before builders started giving away everything under the sun) are unhappily lining up to jump in this boat too. 

The question begs another—are you planning on going anywhere?  If you are not moving anytime soon, you don’t need to do anything about being upside down in your home because the market will eventually equalize and you will be fine.  Real estate is best considered a long term investment.

Maybe it is a time to re-evaluate your home and what you are doing to help keep its value strong.  Find small ways to improve the curb appeal, storage, kitchens and bathrooms.  In a tough market, keeping up with the Joneses isn’t just suburban warfare, it is a necessary evil except this year, let’s fight smarter—when your neighbor buys an RV, you should put new solid surface countertops in your kitchen and baths.  When they buy a car, you should put in hardwood flooring and a new tree.

Frequently, conservative homeowners will ask whether making additional principal payments will help them compensate and equalize their equity in this market.  You should consult your investment professional, but sinking additional capital into an investment that has been beating you up seems silly to me.  Why not invest your funds elsewhere so that you have access to them in order to make your real estate investment liquid if the time to sell comes sooner than you expected?  I’m gonna get some cranky phone calls about that statement, but your real estate is just part of your total wealth portfolio. 

If your loan is less than conservative (negative amortization, unreasonable arm, etc.), you might consider refinancing or paying additional principal.  If you are interested in re-financing, I have found that starting with the lending professional that helped you with your loan in the first place might be helpful.  They know you and your credit situation and may be willing to help find ways to reduce costs since you are a repeat client.

How do you know if you refinanced with a less than conservative appraisal?  Well, for starters, if you told the appraiser what you were hoping your home would appraise for and it came in pretty close to that, you might worry a little.  Honestly, if you asked a six year old in their heart of hearts what they dreamed of for a birthday party and that was exactly what they got, you would be in Beverly Hills.  We are not in Southern California-- I know that we convinced ourselves we were for a while there but there is a lot of land in Northern Nevada and very little of it is more or less desirable than the rest.  Home prices will only rise so high before it becomes cheaper to buy land and build--this places a limit on our appreciation for average single family homes.  Log on to zillow.com and see what your home would sell for.  Then subtract another three percent.  Truly.  Pricing analysis in a  declining market that is any older than 30 days is inaccurate. 

Remember that, when you are calculating what your home is worth, you should subtract 8-9% of the sales price for closing costs--more for homes under $400,000 where new home subdivisions are creating competition that is forcing resale homes to give closing cost and down payment incentives.  Smart owners rarely borrow in excess of 90% of their home's value.  When you owe more than the home is worth, it is not a liquid asset.  Without liquidity, your home is not an asset, it is actually just an expense. 

If you are forced to sell and are upside down, you will either have to come to the closing table with the difference or try to negotiate a short sale with the bank.  There are a couple of different ways that this will play out, but that is a different entry.  Check under Home Sellers title Short Sales--why they suck.