underwater home mortgage loans

Mortgage Company, Refinance

Underwater Home Mortgage Loans: Everything You Need to Know

Sometimes your homeownership experience doesn’t go exactly the way you thought it would. If you think you owe more for your home than it’s actually worth, you may have an underwater mortgage. Home mortgage loans are considered “underwater” or “upside down” when the loan has a principal balance that exceeds the free market value of the property. Below, we’ve discussed the challenges of having an underwater mortgage and what homeowners can do to improve their situation.


How Do Home Mortgage Loans Become Underwater?

When a mortgage becomes underwater, it can make it difficult for homeowners to refinance or sell their home without losing money, leading to financial challenges. This situation can arise for several reasons such as:

  • Market Decline: The most common reason is a drop in the housing market. If home prices fall overall, the value of individual homes may decline below the amount borrowed to purchase them.
  • High Initial Loan Amount: If the mortgage was originally for a high percentage of the home’s value, or if little down payment was made, the loan balance can easily exceed the value of the home, especially if the market weakens.
  • Property Depreciation: If a home deteriorates over time due to lack of maintenance, natural disasters, or other damage, its value might drop below the mortgage amount.
  • Loan Structure: Certain types of loans, like interest-only loans, where the initial payments don’t reduce the principal amount borrowed, can also lead to underwater mortgages if the home value drops or doesn’t increase.


During 2008-2009, about 23% of homeowners in the U.S. had underwater mortgages due to a housing bubble burst, leading to widespread foreclosures and a significant impact on the global economy.


What Can I Do About My Underwater Mortgage?

Having an underwater mortgage isn’t ideal, but it’s also not the end of the world. There are steps you can take to improve your situation such as:


Stay and Pay

If you can afford the payments and like your home, continuing to pay your mortgage is a straightforward choice. Over time, the market may recover, increasing your home’s value.



Talk to your lender about refinancing options that might allow you to take advantage of lower interest rates and reduce your monthly payments.


Loan Modification

Contact your lender to discuss modifying your loan terms. This could involve lowering the interest rate, extending the loan term, or possibly reducing the principal.


Short Sale

With lender approval, you can sell the home for less than the amount owed on the mortgage. This requires lender approval because they must agree to accept less than the loan amount.


Deed in Lieu of Foreclosure

As a last resort, you can voluntarily transfer the deed of your home back to the lender to avoid foreclosure.


Get Help from an Expert

If you would like more information on underwater home mortgage loans or have questions about the homebuying process, we would be more than happy to assist you. Call today to get in touch and speak to a member of our team.