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Drowning in debt? How to get your mortgage and finances above water

July 14, 2015

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Piggy bank underwater

A recent report on mortgage loans reflected a good news/bad news situation with respect to Americans rebuilding equity in their homes after the housing crisis. Regaining positive equity is an important financial milestone, and it is just one example of how such events represent getting your finances out from under water.

An under water mortgage loan is one in which the remaining loan balance represents more than the value of the home. This condition became common when the housing crisis caused home values to plunge. Now, with recovering home prices and a few more years worth of mortgage payments on the books, more and more people are getting their mortgages out from under water.

CoreLogic, a real estate research firm, recently reported that 254,000 US mortgages came out from under water during the first quarter of 2015. That's the good news. The bad news is that 5.1 million residential properties still have lower market values than loan balances. This represents about 1 out of every 10 residential mortgages in the U.S.

Those home owners still have a ways to go to get their loans out from under water. Even once that is accomplished, there are still some other important goals to reach before a household truly has mastery over its finances.

The significance of getting a mortgage out from under water

The ultimate goal in buying a home is to pay off your mortgage entirely. However, for people who have suffered the setback of declining home values, getting their mortgages out from under water represents a significant tipping point.

For one thing, having positive equity in your home greatly enhances your ability to refinance your mortgage. This in turn opens up opportunities to lower your mortgage rate or restructure your loan to make the payments more manageable. In this way, getting a mortgage out from under water can lead to additional improvements in your financial position.

Getting a mortgage out from under water also represents a tipping point from a wealth-building perspective. It is the point when your house moves from being a net liability to a net asset, meaning that your mortgage payments now contribute to your positive net worth.

Other ways to get your finances above water

Here are other examples of getting your finances out from under water:

  1. Clearing your credit balances. Americans currently carry more than $890 billion in credit card debt at an average interest rate of 13.53 percent, according to the Federal Reserve. This projects to a total of $120 billion in annual credit card interest. While just making the minimum required payment will keep you out of trouble with your credit card company, paying credit card interest is a completely unproductive expense. Carrying a balance is an ongoing drain on your finances, so the goal should not be merely to meet your minimum payment requirements, but to pay off the balances as soon as possible.
  2. Paying off student loans. Student loan debt is even higher than credit card debt. Americans now owe in excess of $1.3 trillion on their student loans, and this total has risen sharply in recent years. Getting this debt out of the way is an important step in your financial progress because eliminating student loan payments frees up some of your income for other goals. For example, accumulating enough money for a down payment on a house or saving for retirement.
  3. Meeting minimum balance requirements for checking and savings accounts. This may seem a modest goal, but for many people, not having a large enough balance causes them to incur checking account fees or do without having a saving account. Meeting minimum balance requirements helps put you on the path towards saving money.
  4. Fixing credit problems. Credit problems feed on themselves - they make borrowing money more expensive, which makes meeting your financial obligations even tougher. Repairing your credit not only solves an immediate problem, but it pays off subsequently in the form of cheaper credit.
  5. Getting retirement saving on track. There are a variety of ways to calculate how much you will need for retirement, but whatever the method, people generally find themselves playing catch up because their early-career earnings are not enough to finance sufficient retirement saving. Getting your retirement savings on track means you are no longer on the road towards an impoverished retirement.

As with getting your mortgage out from underwater, the above are financial tipping points. Rather than just representing incremental progress, they represent a situation turning from a negative to a positive. That makes these goals worthy focal points for your financial planning.

To help get your finances above water, consider opening up a high-yield savings account.

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