Explaining Underwater Loans
being underwater on a loan means the value of an asset, such as a house, is less than the amount of the loan or loans used to purchase it. say, joe buys her house for $100,000. joe has $10,000 for down payment but still need to borrow $90,000. she goes to the bank and applies for a loan. the bank determines that the house is worth $90,000 and gives joe the loan. a few months after moving in, joe notices other houses in the neighborhood aren't selling. the owners of those homes are lowering their prices to sell them. suddenly, joe finds the value of her house is now only $80,000. the value of the house is less than what joe owes the bank for the house. this situation is referred to as being underwater or upside down on a loan. a loan on any assets such as a car, boat or motorcycle can also become underwater. simply missing payments can create an underwater loan, as interest in penalties increase the amount of outstanding while the resale value of many these assets can drop quickly. here are some tips to ensure your loan doesn't sink underwater. check the property values in areas you would consider living in. these stats can be found on most county web sites or at county recorders offices. when purchasing a car or motorcycle, check kelley blue book or other reliable sources to learn the true value of the purchase before you buy. finally, if making payments becomes difficult, contact your lender. often they will help you ? short-term financial difficulties and save you from becoming anchor to underwater loans.
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