The upside-down mortgage trap

You don't need to have a crazy interest-only or adjustable-rate mortgage to feel the pain of the housing slump. A reader who posted a question at Free Money Finance wisely put 20% down and got a fixed-rate mortgage in Las Vegas when that housing market was sizzling hot. Now it's not, and he's upside down -- he owes more on the house than it's worth because of dropping values.

His problem is that he wants to move.

"Free Money Finance" wrote: "This is a tough situation. He's played by the rules, been faithful, and is now left paying on an asset that's worth less than what he owes on it. And, to make matters worse, he needs to move (or at least I think that's what he's saying.) So he has to sell at a loss."

• Bing: How much home can you afford?
  

FMF advised that if the fellow really has to relocate, that he sell the house and pay off what he'll still owe over time. The situation illustrates why it's important to "establish as much room between what we make and what we spend as possible," FMF said.

"Mighty Bargain Hunter" also chimed in on this subject. "Moving is a poor option, if it's an option at all," he said. "If he can't swing the shortfall between what the house would sell for and what's owed on it, he's stuck."

What's to be learned from this? Owning a home can limit your mobility, particularly when the housing market is slow. 

Mighty Bargain Hunter said: "This softening housing market will strand a lot of people who bought near the top, and only a recovery will give them their mobility back. If they didn't buy with crazy financing and didn't buy more house than they could afford (like this gentleman), then that's all that will happen. If not, then it will hurt more."

Published May 19, 2008