What Is an Underwater Mortgage?

The nation’s real estate crisis is so severe that it is dragging the rest of the economy down with it. Banks, which lent out mortgage loans almost indiscriminately, are now saddled with fatal amounts of bad debt because people can’t pay these mortgage loans.

How a Mortgage Becomes “Underwater”

Many people bought their homes at the height of the real estate boom, when home values were sky-high. Now, the values of their homes have plummeted — and the end is nowhere in sight. Yet, they still have enormous mortgage loans to pay off.

As home values fell, their loans didn’t. When a mortgage loan is more than the value of the home, the borrower is said to be holding an underwater mortgage.

For example: Let’s say you find a very nice, brand new home in the suburbs of Los Angeles. The year is 2005 and the real estate market is on fire. Your home is valued at $675,000. You get a loan for almost all of it, and you’re making large payments every month. By 2009, however, the value of your home has tanked, and it’s now worth $480,000. Your mortgage is now officially underwater.

The Current Underwater Mortgage Situation

Underwater mortgages are on the rise all over the country. Many home owners are faced with the very difficult question of what to do about their underwater mortgage: Should they continue to pay huge amounts of money every month for something that is worth much less than what they will end up paying for? Many home owners are just walking away from their underwater mortgages, and letting the chips fall where they may.

Underwater Mortgage Help

There are several options for you if your mortgage is underwater. If you have been making regular payments but want to try and lower your underwater mortgage payment, you may want to refinance your home mortgage. It isn’t easy, but you can find out if you’re eligible to refinance your underwater mortgage under the Making Home Affordable Program.

If you can no longer make your underwater mortgage payments and foreclosure is becoming a looming possibility, start by talking to your lender. If you can’t work out an agreement and need to know what to do about your underwater mortgage, there are a few different strategies and government programs you can take advantage of.

Also, the Obama administration has been pushing for principal reduction on underwater mortgages so that borrowers can afford their payments. Bank of America is one of the lending institutions now practicing principal forgiveness.