People will buy a home and make upgrades to it hoping the home prices will rise over the years and that they will be able to sell their home for more than what they purchased it for. However, sometimes things do not work in our favour. If you purchase a home, and its’ price plummets then you are faced with an upside-down mortgage. Now you are faced with a mortgage that is worth more than the house. Many people in this situation are stuck, if they choose to sell they will be at a loss, and if they can afford to pay the mortgage they may be able to wait out the effect. Read on to find out the typical causes for upside-down mortgages.

Buyer’s vs. Seller’s Market
Many buyers will try to time the market. People will often try to buy during a buyer’s market, when buyers have more choices due to the large supply of homes. Considering there is more supply than demand, sellers will need to make their offers more attractive and they will be forced to sell at lower prices. On the other hand, if you happen to make your purchase during a seller’s market, you bought when the price of the home was at its peak value and you stand the chance of losing money if the market turns around.

Non-traditional mortgages
The other name for these mortgages is high-risk mortgages. If you take a high-risk mortgage out then you will only be making interest payments only for the first few years, therefore your payments are low but you are not putting anything towards the principal portion. Often, the home buyer ends up owing more than the original loan.

Hidden expenses of selling your home
Buying and selling a home involves closing costs, lawyer fees, and real estate agent fees. Once these costs are added they can increase the amount of money that you will owe when leaving your home. Some mortgages even have prepayment penalties, in this situation the mortgage holder will be charged if they pay off their mortgage before it comes to term. If you find that these additional costs and penalties will change your mortgage into the upside-down mortgage then see if the lender will accept a short sale. In a short sale transaction the lender will forgive the difference between the amount of the sale and the total mortgage loan. However, this favour does not come without a consequence, your credit report will be damaged and you may not qualify for another mortgage in the future.

If you are in the upside-down mortgage situation the best thing to do is to continue making mortgage payments and wait until home prices begin to rise before selling your home.