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It seems that all you read about in the news these days is homeowners who are ‘underwater' on their mortgage, meaning that they owe more than what the house is worth.

I feel bad for those people, of course, but I think that there's a large group of people that are not getting attention.

No, I'm not talking about those that I would call, for lack of a better term, treading water.

The definition for treading water would be simple. You have equity in your home, but really you don't.

How's that possible, you say?  Glad you asked.

I would look at it very simply.  If you are ‘near' the line where you have equity (anywhere between 0-8%), chances are you're treading water.

Say you have a home that's worth $105,000 with a $100,000 mortgage.  You're above water, right?


The reason being is simple.  If you're going to look at what your home is worth, I feel that you have to base it on what you would expect to receive after a sale.

In my example above, you're not going to get $105,000.  First, and foremost, you would owe the bank $100,000.  That leaves $5,000.  But, chances are you're going to list it with a realtor, so you would have realtor fees.  Most ‘standard' listings come at a cost of 6%, or in this case, $6,300.

Uh-oh.  Do you see where we're in trouble?  Already, your $5,000 ‘equity' is gone and you're $1,300 in the hole.

But, it gets worse!

There are other fees involved with selling a house.  Most buyers will want you to pay for a one-year warranty, which is probably $500 or so.  Depending on where you live, there are transfer fees and other charges and taxes that add up to another 0.5% to 1%.  Assume the worst, and that would be another $1,000 or so.

So, between the realtor fees, the home warranty, and the other fees, you'd be looking at about $7,500 in fees.  In other words, though some will look at your situation and say that you're above water, in the end that's not going to be the case.  In my example, you would not only walk away with nothing, but you'd have to come to the closing with a check for roughly $2,500.

That's why I look at the range between 0-8% equity in your homes as ‘treading water'.  My rough estimates show that, unless you're willing to go ‘For Sale By Owner', you aren't technically ‘above water' until you have 8% equity or more.

I coined this term because it's factored into my net worth calculations for quite some time.  The estimated value of our home is technically above what we owe on the mortgage.  So, we can't say we're underwater.  However, I calculate our net worth on the premise of what we would have if we liquidated our assets, so after I add what I consider ‘standard' costs to achieve that theoretical  liquidation, the number becomes negative.

Or in other words, we're treading water.