An underwater mortgage has nothing to do with swimming and is certainly not at all like a trip to the beach. When your mortgage is underwater, you may feel like you're drowning because it can spell serious financial trouble and may even result in foreclosure. In the first quarter of 2019, based on an ATTOM Data Solutions' report, 9.1 percent of mortgage U.S. properties (totaling more than 5.2 million properties) had loan balances that were at least 25 percent more than their market values.
Underwater Mortgage Definition
When you owe more money on your home than it is worth, your mortgage is underwater. People with underwater mortgages don't have equity in their homes and typically have to sell their homes at a loss -- if they sell. Sometimes a mortgage ends up underwater because the home value has decreased, and when a home's value keeps decreasing, it can be incredibly difficult to get out from underwater if you don't make extra payments on your mortgage.
Underwater Mortgage Causes
Underwater mortgages can be caused by many factors. Decreasing home values have left many buyers underwater on their mortgages. Some buyers end up underwater because they put little or no money down on their homes. The skyrocketing interest rates associated with adjustable rate mortgages can also cause a mortgage to go underwater because mortgage payments may go primarily to interest rather than to principal.
The subprime mortgage crisis, blamed for the recession that began in 2007, also contributed to the underwater mortgage crisis. Buyers who should not have qualified for large loans -- or for any loans in some cases -- were given large loans they could not possibly repay.
Underwater Mortgage Consequences
Being underwater in your mortgage doesn't necessarily have any immediate consequences. It's generally when you want to refinance or sell that you'll run into problems. People who are struggling to make monthly mortgage payments are especially likely to be harmed by an underwater mortgage because they have no way of getting out of the mortgage. This can increase their risk of foreclosure.
Underwater mortgages are also harmful to the larger economy because foreclosures lower the property values of neighboring homes, banks lose money and home ownership decreases.
Underwater Mortgage Strategies
Some lenders offer loan modification programs to help people who are underwater, but you generally have to have a history of timely payments. You can also simply stay put and continue to pay, which may be your best strategy if there is a chance your home's value might go back up. Some people opt to sell their homes in a short sale to get out from underneath their mortgage, and others simply allow their mortgage to go into foreclosure and walk away.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.