Underwater Mortgage Options

When a homeowner owes more money in mortgage payments than the current market value of their house is worth, they have an underwater mortgage. It’s one of the most disconcerting problems in the mortgage industry, and one of the most troubling types of debt anyone can ever struggle with.

Since the subprime housing crisis of 2008, underwater mortgages have become commonplace in the lending world. By the first quarter of 2012, underwater home loans continued to burden 16 million people — over 31 percent of American homeowners.

The good news is that underwater mortgages can be avoided and repaired. With some careful mortgage planning and access to underwater mortgage options, homeowners can avoid debt, foreclosure, bankruptcy and sadly, home loan abandonment, and get their mortgages “out of water” and back on track.

What Causes an Underwater Mortgage?

When a person pays off their home through a mortgage, the house builds positive equity, or value. In an underwater mortgage, a house develops what’s called “negative equity” — a home is worth less than the balance owed on it. (A similar problem, upside down loans, are common in the auto industry.) There are many ways a mortgage can turn sour:

Refinancing. When a home already contains equity, it’s common for borrowers to refinance their mortgages while borrowing against the home’s value. However, if this happens when a home’s equity is small, a homeowner can quickly find themselves underwater on their mortgage.

Financial changes. Loss of a job or other financial strains can lead adversely affect one’s mortgage. Many homeowners may actually take out second or third mortgages on their homes to buy time temporarily, but when they fall behind on their payments, their mortgages are submerged.

Market values. A change in property values or market conditions, like those in the housing crisis four years ago, can place a burden on a homeowner’s mortgage. In some circumstances, a homeowner in financial trouble may be unable to sell their property, but unable to keep up with their monthly payments, they develop an underwater mortgage.

Help for Underwater Mortgages

An underwater mortgage may feel like it sounds — that a homeowner’s finances and livelihood are drowning. But homeowners can find help through government-sponsored programs and other smart financial approaches.

“HARP” and “HAMP.” Refinancing underwater mortgages can happen via federal relief. Under President Obama’s Making Home Affordable Program, underwater mortgage homeowners with a solid payment history and good credit score can refinance with the Home Affordable Refinance Program. Borrowers, according to various sources, can refinance under HARP from 105 up to 125 percent of their home’s value. There’s also HAMP — the Home Affordable Modification Program — where borrowers facing financial hardship can modify the terms of their existing mortgage. (Terms of the MHA program have been extended to the end of 2013.)

Mortgage settlements. Lenders may be willing to renegotiate your mortgage and change and/or settle terms depending on a borrower’s own financial situation. There are also nonprofit consumer advocacy groups specializing in homeowner and real estate issues, who are willing to help and point residents in the direction they need to get their mortgages back in shape.