What to know and do

An underwater or upside-down mortgage occurs when the value of the home is higher than the mortgage amount. These instances are not common, but can occur when home values decline.

a large lawn in front of a house: An exterior of a home and yard

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An exterior of a home and yard

“Being underwater or upside down on a home, car or any other asset means that you owe more than the current value and have negative equity,” says Greg McBride, chief financial analyst at Bankrate.


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How homeowners land underwater

Being upside-down is much less common now than it was in the last recession. During the 2008 housing crisis, many borrowers were shocked to learn that their home was valued at less than what they had paid for it, says Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization.

Housing markets can be unpredictable, and there are several factors that cause home values to rise and fall, such as rising interest rates, high rates of foreclosures and short sales in your area, and natural disasters, Boies says. However, underwater mortgages usually occur during an economic downturn in which home values fall, sometimes by a large percentage.

In one scenario, say Jane purchased her home for $200,000, but made a $20,000 down payment and only borrowed $180,000, Boies says. Two years later, Jane becomes unemployed, but has an excellent job opportunity in another state. She needs to sell her house and move, but learns that home values in her area have declined and her house is only valued at $150,000 – and, she still owes $176,000 on her mortgage. She is now underwater, or upside-down.

In addition to declining home prices, homeowners can find themselves in this financial situation when they buy homes with little or no money down or borrow against most or all of the equity, McBride says.

“Note that even a stagnant home price can leave you upside-down if you wish to sell the home soon after because the transaction costs of selling could more than offset what little equity you have,” he says.

Another way to become upside-down would be borrowing secondary financing equaling more than 100 percent of the value of the home, or taking out a mortgage that would result in negative amortization over the life of the loan, adds Holly Lott, a senior branch manager at Atlanta-based Silverton Mortgage.

When being underwater is risky

Being underwater on a mortgage is only a problem if a homeowner needs to sell in a short time period or wants to refinance for a lower interest rate, McBride says.

Otherwise, consumers can keep making their payments and “over time can get right-side up by paying down some of the principal balance and/or seeing some appreciation in the price of the home,” saysMcBride.

People who find themselves in hardship situations may find it nearly impossible to…

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