Everybody wants to know what a short sale is and there seems to be some confusion on the subject. I asked a few folks what a short sale is and I got varied. Lets explain what this really is.

You bought a house, a commercial property, an investment property, or maybe even a piece of land. Your borrowed money to buy the piece of property and took out a mortgage. Now the real estate market crashed. Insurance went up, taxes went up. You may have lost your renters, your job, and for whatever reason you can’t afford to make the monthly payments.

Now the property is worth less than you owe the bank. A short sale is when you ask the bank to accept less, allow you to sell your property and still discharge the mortgage and let you off the hook for the remaining balance. If the lender agrees to it, thats a short sale.

people do it all the time. We’ve been doing it since time began. If I lend you $100 dollars and you don’t pay me back for 6 months but show up on my doorstep and offer me $80 and tell me thats all you have. Am I going to take it? Of course I am. I know if I don’t take that $80, I’m never going to get my money back.

And this is precisely the position a lot of these lenders are in right now with mortgages. This is the toughest real estate market in the history of modern mortgage lending. Foreclosure rate is at an all time high and the lenders don’t know what to do. The bank knows they might only recover 40 or 50 cents on the dollar if the property goes into foreclosure. No one is buying foreclosures on the courthouse steps. They’re going to hold the property, pay the taxes and insurance and maintenance for how long?

Make them a short sale offer. Even though its more than you owe, its still might be a great deal for the bank and they might be willing to do it. So, don’t give up, try a short sale if you’re upside down on your property with no way out.

If our homes are our castles, then our mortgages are the dungeons, because they lock us into debt. Best way to escape, paying extra principal every month. Say you have a $170,000, 6% / 30 year mortgage. Make your normal $1020 monthly payment and you’ll pay it off in 30 years and $197,000 in interest payments.

But suppose you pay $2000 a month instead of $1000. You’ll be free in 9 years instead of 30 and you’ll pay only $52,000 in interest, thus saving yourself $145,000.

So paying down a mortgage is certainly smart, but is investing it smarter? To find out, compare paying on your mortgage with what you could earn elsewhere. Mortgage interest is often deductible. If you’re in the 25% bracket and you deduct your interest, after tax you’re only out of pocket 4.5%. And stocks have historically done twice that much over time. And put that money in a 401 or IRA and you’ll bypass taxes too.

Bottom line, the numbers say if you have extra money, you’re probably better off investing it rather than paying down the mortgage. But thats just the numbers. Paying off your mortgage might also buy you peace of mind, something that investing in stocks might not do. And thats particularly true as you reach retirement age. So you really need to thing this one all the way through then decide.

RealtyTrac Foreclosure Service issued a statement saying that 430,000 foreclosure filings, default notices, auction sale notices and bank repossessions were reported nationally during the first quarter of 2007. Thats 1 in every 260 homes. According to Moodys Analysts, Mark Zandy, 2.87% of the total US housing market is in some sort of foreclosure. Zandy feels the problem will continue through out the year as subprime loans reset to new higher interest rates. This figure represents a dramatic increase in foreclosures. Up 35% from the same quarter in 2006 according to RealtyTrac. Keep in mind the largest part of the 430,000 foreclosure filings include the default notice which is a letter mailed to owners who are more than 30 days late on their mortgage payment. You should also understand that a property may have up to 3 foreclosures taking place at the same time. If the owner has a first mortgage, a second mortgage and a home equity loan.

less than 6 percent of these default notices will become actual foreclosures as most homeowners will make up their payments and late fees. On April 24th, Countrywide Financial CEO Angelo Mozillo says he expects the mortgage market to improve in 2008 and be “very healthy” in 2009. He said that 5% of the nations riskiest sub prime loans may face foreclosure and that the rest will no go into foreclosure.

Currently, there are more homeowners than at any other time in the united states. Much of this is due to sub prime or exotic loan markets. Although foreclosures are at an all-time high, so is home ownership.

It is almost impossible for someone to rent in todays real estate market and save tens of thousands for a down payment and closing costs. It is an unrealistic reality for most people trying to live the American dream.

Many homeowners today got their opportunity today through the sub prime loan programs and more than 90% will make good on their dream of long term home ownership.

Looking at sub prime mortgage companies that have gone bankrupt or are severely damaged by the market change, we need to keep in mind that we live in a free market society and that these companies chose to lend at higher rates to these people.

The investors in these assets chose the risk to receive the higher return. It just didn’t work out for them.

Paul and Sarah Whittaker just got back from their honeymoon in Whistler. Paul, a recent graduate from USC, has just begun a career in banking. Sarah is just beginning nursing school. Both are eager to purchase their first home. With a $10,000 wedding gift from Sarah’s parents, and $5000 they together have in savings, they figure they have enough for a 3% down payment on a $500,000 new home.

Now, just a few years back, a boom in the housing market meant a sure benefit with the rising home values. In todays market overcome with foreclosures and depreciating homes, the prospect of home ownership becomes less appealing and much more risky.

Sure, the pride of ownership outweighs the potential losses for some, but for these newlyweds just getting on their feet, the risks of a further market slide and the additional housing expense from the mortgage and maintenance isn’t the right course to start on argued Tim, a financial analyst. After reviewing this couple’s lease renewal options, Tim suggested to sign for a 12 month lease at $1200 per month instead of the shorter 3 and 6 month options.

Paul was interested in a $500,000 starter home in southern California and with his good credit could get a 6.25% fixed rate for 30 years. However, even with 3% down, the mortgage payment with taxes, insurance and private mortgage insurance, the couple was looking at $4019 a month.

While Paul argued he could afford this mortgage at his income of $10,000 a month, the reality is that Paul being the sole income earner, they need to make sure to put some cash aside before taking on that much risk. Additionally, the costs of the monthly mortgage would leave little money left over for this couple to put any money away. With Sarah still two years away from graduating and Paul employed in the banking industry where layoffs are occurring and more projected, Tim believes Paul and Sarah would benefit much more by continuing to rent at $1200 a month and putting the other $2800 they would have spent on their mortgage into CD’s and begin funding Paul’s retirement plan. When Sarah graduates and becomes employed, the market will have likely settled and they would have nearly enough to put 20% down on the $500,000 dream home and be able to skip paying private mortgage insurance. All the while, comfortably knowing that they wouldn’t need to worry about the “what ifs” of Paul being layed off or not having any savings for emergencies.

Tim’s analysis of this couples financial situation cleared up some of the issues and risks of homeownership. Paul and Sarah have taken this advice and, to Tim’s surprise, are happier now knowing they can still enjoy taking their ski trips they so much enjoy.