How To Get A Refund If The Housing Market Crashes

Certified Mortgage Advisor
NMLS 1701021
Published 
June 20, 2022

Can we get a refund if the housing market crashes?

Let's talk about a Reddit post, actually, two of them that have been going viral in the home buying community here recently.

Reddit post that we don't want to hear

So this person said I purchased my house recently six months and am concerned that housing prices will drop when they do. Who do I contact to get my principal lowered? Will the realtor or the bank? Give me a refund for the difference. This has been going around a lot, and then I've also seen another one that said, what happens if you buy a house? Then a few years later, the housing bubble bursts, and prices reduce. Say you buy a house at $500,000, you pay for a few years, and then the house is valued at a lot less.

Does the money you paid on the mortgage, essentially pay off the house faster. And are you owed money? The short answer to both of these is known. Nothing actually happens.

Let's be kind to people, especially when they need guidance

Now, these posts have been going a little bit viral in kind with the finance and housing bubble, and first-time home buyer communities on Reddit. And I've seen it on Twitter as well. And I will say really quickly it's disheartening. It's hard to tell if this is a troll or not, if someone's just like putting stuff out there to be funny, or if they're being serious, but either way, it's disheartening because underneath all these posts are people just mocking people who maybe don't have access to good financial education.

And I really think it's disappointing when somebody has a question about finances that they're going here and saying, hey, can you help me understand this? And people are just making fun of them because they don't understand but they were asking a question they might not know.

There's no dumb question

First of all, I want you to know that if you do have a question about buying, there is no dumb question. It is good to explore information. I think it's really upsetting when people just put other people down because they don't have access. They didn't have access to good financial education. So they're just gonna make fun of them. Even when they ask it, doesn't make sense.

Negative equity

Ultimately in these situations, just to recap, nothing actually happens if you buy a home for $500,000 and then the price goes down nothing really changes you aren't owed money back. You're not going to get a refund.

You bought a home that was worth 500,000 and you paid 500,000 for it and you took out a loan. You put a small down payment on it. If the value of that decrease. You still have the exact same loan and the value decreasing doesn't actually change your payment either, right? Because let's say you bought it for 500,000 and you took out a loan for 450,000, meaning you put 50,000 down. You still have a loan for 450,000, even if the home price goes down to 425.

So this is what people call negative equity. That is when your loan balance is higher than your home is worth. So for instance, you owe $450,000 on your loan, but your home value is only worth $425,000. So you owe $25,000 more than your home is worth. So if you needed to sell your home, you actually needed to bring an additional $25,000 to the closing table. To be able to pay off the lender when this becomes an issue is not when you own the home because nothing actually changes.

There are no big changes unless you will sell it

I think sometimes when we talk about a potential housing crash, or correction or values go down, I think sometimes people can forget that if you already own a home, and the value decreases, nothing actually changes to you at that moment. What does change though? Is your ability to sell it in the future.

So when you are underwater in this position or have negative equity, it can prevent you from being able to sell your home without bringing money to the closing table. Most people are used to the idea that they can buy a home and then they can live in it for a few years and then they can sell it and get a check back.

But if you bought a value up and then the home value decreases, you may still have a loan balance that's higher than what you can sell the home for. And if that's the case, then you may actually need to bring money to the closing table. And many people aren't in that position were to sell their home, they actually have to pay off a balance on their loan. And so it can keep you stuck in a home where you either have to bring money to the closing table or you can't sell, cuz you don't have the money to be able to do this.

Think of it in the same way as a car like the used car market. If you have a car that's worth, I don't know, $20,000 It's worth that because that's what the market is willing to pay for it. As we saw with some of the shortages that have been happening recently, people are more willing to pay for that car because it's more in demand.

It's the same with houses where the value is based on the demand in the market. And just because you paid $20,000 for the car, doesn't mean that the market is gonna pay $20,000 for it. You might have bought it for $20,000, but in five years, that car might only be worth $12,000.

Don't sell your home just yet

So again, ultimately the main issue with negative equity is not what happens to your payment. You're not owed money back or anything like that. It just is you have a loan and you still have to pay off and the issue becomes then when you want to sell if the home value is lower than what your loan balance is, you're going to bring money.

You're gonna need to bring money to the closing table to be able to sell the home. And if you can't do that, then you're either going to have to rent out the home. If you wanna move somewhere else or keep staying there longer.

Pressure is not part of the game

So ultimately you don't wanna end up like this person don't feel pressured into buying a home if you don't feel comfortable with how the home buying process and home selling process works. So many people get really swept up in home buying. And I see this all the time where people go, I think I wanna buy a house. Then they dipped their toe in the water, and all of a sudden they didn't realize that little stream is now like a raging river that they get swept away in.

Take a pause

It goes from, I think I wanna buy a house to browsing houses online. All of a sudden they wrote an offer and they're under contract. And then they look back and realize, is that was this really what we wanted to do? Cuz the process is going to move very quickly. As you start talking with more people, you start talking with a real estate agent.

You start talking with a loan officer, and it's really easy to assume. I am now a home buyer when in reality, at any moment, you can take a step back. You can take a pause, you can step out of home buying. You absolutely can do that. Don't feel pressured into buying just because you see values go up or interest rates go up or everyone else seemingly buying a home because you don't wanna end up in a situation like this, where you're not actually comfortable with how everything works.

When is the best time to buy?

The best way to buy is to make sure that you feel very comfortable with your finances and that you feel very comfortable with your plan. And you understand, if I buy a home, I ideally wanna live in the home for, maybe 3, 5, 10 years, and then we're comfortable selling the home. But if you don't understand how this works, and you're only planning based on your monthly payment right now, you could end up in some hot water if you don't understand things like this.

So the best way to buy is to buy it. What fits your budget and your goals. And if you're planning on staying, living in your home for at least five years, the longer you plan on staying living in your home, the more that lowers your risk of a market downturn.

Market downturn

Because let's say you wanna buy your home now, and let's say in the next 30 years home values decrease. If that's the instance, if that's the case and you wanna sell in three years, you might be in the same position where you need to bring money to the closing table, or you can't sell on the opposite side.

If that's a longer time period, 15 years, historically, there's never been a decline that lasted that long. So you would be able to recover your money and not have to bring money to the closing table. The longer you plan on staying in your home, the less risk it is of running into negative equity like this.

Don't be afraid to ask a question

There is no question that is off limits. Please work with somebody who is comfortable helping you understand the questions that you have. You should never feel ashamed of the questions that you have just because you're wanting to understand the process better.

Talk with a loan officer
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