What Is an Underwater Mortgage?

What Is an Underwater Mortgage?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

An underwater mortgage is when the current balance of your mortgage loan is higher than the present market value of your home. This typically occurs when housing markets decline, and property values drop. When this happens, homeowners might find themselves paying more for their houses than what they’re worth. Being underwater can make it difficult to refinance a mortgage or sell the property. Homeowners may also face the tough decision of whether to keep paying into a mortgage on a home that might not regain its lost value.

Related Questions

1. How does a mortgage become underwater?

A mortgage becomes underwater when the property’s value dips below the amount owed on the home loan. This situation often arises from a decline in the property’s value, an increase in mortgage debt, or a combination of both.

2. What can you do if you have an underwater mortgage?

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If you have an underwater mortgage, some potential options include sticking it out and continuing to make payments, refinancing the mortgage, negotiating with the bank for a loan modification, or selling the property through a short sale or foreclosure. However, these do have implications on your credit score and financial situation, so it’s crucial to consider all the factors and perhaps seek professional advice.

3. Can you refinance an underwater mortgage?

Yes, you can refinance an underwater mortgage through programs like the Federal Housing Administration’s Short Refinance for underwater homeowners. However, qualifying for such programs typically requires proving financial hardship, and not all lenders participate.

4. How can I avoid an underwater mortgage?

To avoid ending up with an underwater mortgage, it is generally recommended to put a significant down payment on your home and aim for a 15-to-30-year fixed-rate mortgage. Monitoring housing market trends, maintaining your home to prevent its value from diminishing, and choosing a house that you plan to stay in for a long time can also help lessen the risk.

5. Is an underwater mortgage the same as negative equity?

Yes, an underwater mortgage and negative equity describe the same situation. Both terms refer to owing more on the home loan than the current market value of the property. Despite the negative connotation, they do not reflect the homeowner’s overall financial ability or stability.