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What is an Underwater Mortgage?
An underwater mortgage is a home loan where the outstanding balance is greater than the current market value of the property. This means that if you were to sell your home today, you wouldn’t be able to pay off the mortgage in full. You’d be left with a deficiency, also known as negative equity.
How Does an Underwater Mortgage Happen?
There are a few reasons why a mortgage might become underwater:
- Falling Home Prices: This is the most common reason. If the market value of your home drops below the amount you owe on your mortgage, you’re underwater. This can happen due to a general economic downturn, a decline in the local housing market, or even just a change in your neighborhood.
- Taking Out a Large Loan: If you take out a loan for more than the value of your home, you’re immediately underwater. This is more likely to happen if you have a low down payment or if you’re using a loan with a high interest rate.
- Defaulting on Your Mortgage: If you miss payments on your mortgage, your lender may start foreclosure proceedings. This can lead to a situation where you’re forced to sell your home for less than you owe, leaving you underwater.
What Are the Risks of an Underwater Mortgage?
Being underwater on your mortgage can be a stressful situation. It can make it difficult to sell your home, refinance your loan, or even just stay afloat financially. Here are some of the biggest risks:
- Difficulty Selling Your Home: If you need to sell your home, you’ll need to come up with the difference between the sale price and the amount you owe on your mortgage. This can be a major financial burden, and it may mean that you have to sell your home for less than you’d like.
- Limited Refinancing Options: If you’re underwater on your mortgage, you may not be able to refinance to a lower interest rate. This means you’ll be stuck paying more for your mortgage each month, which can put a strain on your budget.
- Increased Risk of Foreclosure: If you’re struggling to make your mortgage payments, being underwater can increase your risk of foreclosure. This is because your lender may be more likely to foreclose on your home if they know they won’t be able to recoup the full amount of the loan.
What Can You Do if You’re Underwater on Your Mortgage?
If you find yourself underwater on your mortgage, don’t panic. There are a few things you can do to try to improve your situation:
- Wait it Out: If you can afford to stay in your home and make your mortgage payments, the best course of action may be to simply wait it out. Over time, the market may improve, and your home’s value may increase. This will eventually bring you out of the underwater position.
- Refinance Your Mortgage: If interest rates have fallen since you took out your mortgage, you may be able to refinance to a lower rate. This will reduce your monthly payments and free up some extra cash that you can use to pay down your principal balance.
- Sell Your Home: If you can’t afford to stay in your home or you need to move, you may need to sell your home. This can be a difficult decision, but it may be the best option if you’re facing financial hardship.
- Short Sale: If you’re unable to sell your home for enough to cover the mortgage balance, you may be able to do a short sale. This is where your lender agrees to accept less than the amount you owe on the loan. A short sale can damage your credit score, but it may be a better option than foreclosure.
- Seek Professional Help: If you’re struggling to deal with an underwater mortgage, it’s important to seek professional help. A financial advisor or a housing counselor can help you understand your options and develop a plan to get back on track.
Additional Resources
- Bankrate: Underwater Mortgage: What It Is and What to Do
- Investopedia: Underwater Mortgage: Meaning, Overview, History
- National Foundation for Credit Counseling: Underwater Mortgage
- Consumer Financial Protection Bureau: Underwater Mortgage
Frequently Asked Questions
- What does it mean to be underwater on a mortgage?
It means that the outstanding balance on your mortgage is greater than the current market value of your home.
- How do I know if I’m underwater on my mortgage?
You can find out if you’re underwater by getting an appraisal of your home. This will give you an estimate of the current market value.
- What are the risks of being underwater on a mortgage?
The risks include difficulty selling your home, limited refinancing options, and increased risk of foreclosure.
- What can I do if I’m underwater on my mortgage?
You can wait it out, refinance your mortgage, sell your home, do a short sale, or seek professional help.
Being underwater on a mortgage can be a stressful situation, but there are steps you can take to improve your situation. By understanding the risks and exploring your options, you can make informed decisions about how to move forward.
Stay in the home and build equity
You have the option to remain in your house and keep making loan payments to lower the principal amount if you have an upside-down mortgage.
“Essentially, you’re riding out the market until values take a turn and go higher,” says Lott. “While waiting for home values to rise, it would be beneficial to make additional loan principal payments during this time.” ”.
Explore new financing
If your loan is underwater, you may have fewer options for refinancing, but you may still have some options. Speak with several mortgage refinance lenders to find out if you can refinance your upside-down mortgage. If your original loan is an FHA loan, you might be able to qualify for a streamline refinance.
Unfortunately, Fannie Mae’s High Loan-to-Value (LTV) program has been suspended, and the Home Affordable Refinancing Program (HARP) loans were sunsetted in 2018.