Still Little or No Equity in Your Home? Try This Solution

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Even with nice bounce-back appreciation over the last few years, almost 10 million homeowners are underwater, according to Forbes. And more than one third of American homeowners are effectively underwater, meaning they have less than 20 percent equity.

I salute homeowners who are riding out the storm, but life can get in the way of our best intentions. Many negative-equity homes will be forced on the market by job transfers, divorces, job losses and deaths. What can you do if you are forced to sell a home with negative equity? Many people don't have the cash to make up the shortfall but don't want to consider a foreclosure or a short sale.

The only cure is time, and the property needs time for two things. The first is future appreciation, which of course is not guaranteed. What is guaranteed is that regular payments over time will reduce the mortgage. If you don't have time, use a long-term lease option to turn the payments over to someone who would be thrilled to have the benefits of any future appreciation and debt reduction.

For Example

Let's say eight years ago you bought a $250,000 home. It's now worth $200,000, and your mortgage balance is $221,000. This loan is current and was taken on a 30-year amortization at 6.5 percent. The principle and interest payment is an affordable $1,580, plus taxes and insurance.

Market your home to people interested in putting down roots for longer period than most leases allow. Offer them a two-year lease with the right to renew that lease four more times for a total of 10 years. During that time or after the 10 years are up, they have the right to buy the home for the mortgage balance. Their monthly payment is $1,800 (which includes taxes and insurance), and they agree to handle all maintenance and repairs. You could expect to receive a $5,000 to $10,000 nonrefundable option deposit from the tenant/buyer because of these very attractive terms.

After 10 years, that original $250,000 mortgage now has a balance of $158,000. The value of the home with modest 3 percent appreciation could be $270,000. This gives the new tenant/buyer $112,000 equity in the home, and you get out from a bad financial situation with your credit and honor intact. You also would have depreciated the property for all those years, giving you some annual tax benefits. Plus, you had very few headaches during because the tenants/buyers agreed to handle maintenance.

You hope obviously that the tenants buy you out by refinancing or selling. If they default, you evict them just like a normal tenant. Then the play would be to sell the home and pocket any extra equity yourself or re-lease the property. This strategy puts time and current market forces in your favor.

John Jamieson is the best-selling author of "The Perpetual Wealth System." Follow him on Facebook and Twitter.
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