When you bought your home, you probably imagined building equity and watching its value grow over time. But what happens when the opposite occurs? If your home's value drops below what you still owe on your loan, you're dealing with what's called an underwater mortgage. It's not a comfortable position to be in, but understanding what it means and what you can do about it can help you make informed decisions about your financial future.
An underwater mortgage refers to a home loan where the outstanding balance exceeds the current market value of the property. You might also hear this called being "upside down" on your mortgage or having negative equity. Either way, it describes the same challenging situation.
Here's a simple example. Let's say you bought your home for $350,000 with a $35,000 down payment and borrowed $315,000. A couple of years later, the housing market in your area takes a hit, and comparable homes are now selling for only $290,000. But you still owe $305,000 on your mortgage. That $15,000 gap means you're underwater.
This isn't just a theoretical problem. During the 2007-2008 housing crisis, millions of homeowners found themselves in exactly this situation as property values crashed across the country.
An underwater mortgage can develop in several ways, and understanding the causes can help you recognize warning signs early.
Economic downturns are the most common trigger. When the broader economy struggles, home values often decline. Your monthly payment stays the same, but the asset you're paying for is worth less.
Buying with little money down can leave you vulnerable, especially if you need to sell soon after purchasing. Even if home prices stay flat, the transaction costs of selling might wipe out your small equity stake. Some lenders now offer 50-year mortgages that keep borrowers at risk longer by slowing equity buildup.
Taking out a second mortgage that drains most of your ownership stake can also flip you underwater. Rising interest rates, neighborhood foreclosures, or even natural disasters can drag down property values, too.
Related: What Happens To Your Mortgage When You Sell Your House
You might not realize you're underwater until you try to sell or refinance. But there are indicators that can tip you off earlier:
Catching these signs early gives you more time to plan your next move instead of scrambling when you need to sell or refinance.
If you're planning to stay in your home long-term and can comfortably make your payments, being underwater might not affect your daily life much. You can keep paying down the principal, and hopefully, over time, your home's value will recover.
But there are situations where being underwater creates real problems. Refinancing becomes nearly impossible unless you qualify for specific government programs. Selling your home gets complicated because you'd need to bring cash to closing to cover the gap between the sale price and what you owe.
The biggest risk? If you can't afford your payments anymore, you're facing potential foreclosure with no equity cushion to fall back on. That combination puts you in a genuinely difficult spot.
Related: How To Get Rid Of Mortgage Insurance
Finding yourself in this situation doesn't mean you're out of choices. Here's what you can consider.
The simplest option is often to ride it out. Keep making your regular payments and, if possible, pay extra toward the principal. As you chip away at the loan balance and wait for the market to recover, you'll eventually get back to positive equity. This works best if you're not planning to move anytime soon and your payments are manageable.
Your refinancing choices are limited but not necessarily zero. Some lenders offer programs specifically for underwater mortgages. If you have an FHA loan, you might qualify for an FHA streamline refinance that requires less equity. Talk to multiple lenders to see what's available. At Mares Mortgage, mortgage questions get answered by experienced professionals who can walk you through what's possible.
If you're struggling with payments, mortgage modification options might help you keep your home. Your lender could adjust your interest rate, extend your loan term, or make other changes to lower your monthly payment. This doesn't fix the underwater problem directly, but it can buy you time to recover.
A short sale means selling your home for less than you owe and having your lender agree to accept that amount as payment in full. It's not ideal, it will damage your credit, but it's often better than foreclosure. Lenders typically only approve short sales when foreclosure seems like the next step anyway.
Some homeowners choose a strategic default, simply walking away from the mortgage. This tanks your credit score, and the lender might still pursue you for the remaining debt, depending on your state's laws. It's genuinely a last resort and should only happen after you've explored every other option and talked to a financial advisor.
Being underwater on your mortgage feels overwhelming, but you don't have to figure it out alone. Working with experienced mortgage professionals can help you understand what options make sense for your specific situation. Whether you're looking to stay in your home, explore new financing, or need guidance on next steps, start a conversation with our team to discuss your path forward.
An underwater mortgage isn't the end of the world, but it does require careful thought about your options. If you can afford to stay and wait out the market, that's often the smartest play. If you need to move or refinance, you'll face more challenges, but solutions exist. The key is understanding where you stand and getting the right advice before making any major decisions. With Mares Mortgage's 30-plus years of experience helping Southern California homeowners, you'll have knowledgeable support as you work through this situation and plan your next steps.
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