What Is an Underwater Mortgage?

Here's what you need to know to avoid foreclosure.

After the housing market crash several years ago, many homeowners discovered they had underwater mortgages. Despite the name, an underwater mortgage has little to do with water. If you’re worried about paying your mortgage or the value of your home, there are steps you can take to avoid foreclosure.

What You Need to Know About Underwater Mortgages

An underwater mortgage occurs when the remaining balance of the mortgage loan is more than the fair market value of the property. For example, if a homeowner owes $200,000 on his home but it’s worth $100,000, that means his mortgage is underwater by $100,000. That sum is also referred to as negative equity.

Related: Apply for a Mortgage Loan Today

Underwater mortgages can occur for a number of reasons. Taking out a second mortgage or a home equity loan, for example, might cause you to be upside down on your mortgage. Economic crises and housing market crashes have historically led to homeowners to have negative equity in their homes.

Underwater mortgages, also called upside down mortgages, are more common than you think. Over 13 percent of homeowners, or more than 11 million people, carry negative equity on their home mortgage, according to Statistic Brain. This fact might make homeownership seem risky, but don’t get discouraged. Options are available to alleviate the issue if you find yourself in this situation.

See: 20 Cheap Renovations That Increase Your Home’s Value

5 Steps to Take If Your Mortgage Is Underwater

If your home significantly dropped in value, causing you to lose equity and become underwater on your mortgage, you have options. Here are five things you can do if your mortgage is underwater:

  1. Stay where you are. If this is your dream home, then stay. There’s no written rule that says you have to leave. The market could rebound and undo an underwater mortgage.
  2. Consider a short sale. If you need to get out of your home right away — possibly because you have other outstanding debts or want to cut your losses — consult your lender for advice and approval. Be prepared to sell it for a lower price than you paid.
  3. Walk away. Consider a strategic default if you’re stressed about your mortgage being upside down and don’t think the market will rebound. Caution: Walking away will wreak havoc on your credit score.
  4. Refinance your home. A lower interest rate and lower monthly payment through refinancing your mortgage might give you the relief you need in the short and long term. Research the Home Affordable Refinance Program available from the federal government to see if you qualify for participation.
  5. Get a deed in lieu of foreclosure. Consider a deed in lieu of foreclosure, in which you sell the home back to the original mortgage lender. This saves the lender the cost of foreclosure proceedings. Check the market value before taking this step, and make sure your home is in good condition as a potential asset.

Loan modifications might also be available through your lender, especially if you’re already behind on payments, to help relieve your situation and allow you to stay in your home. Before taking this or any other steps, consult with your lender to determine what options are available to you. Weigh the pros and cons, including long-term effects such as a damaged credit score, before taking any definitive action.

Learn: 7 Ways Homeowners Can Dispute an Absurdly Low Appraisal

A home loan that has become an underwater mortgage doesn’t mean you don’t have options. Consider refinancing, strategic default or even a short sale to gain peace of mind. Homeownership doesn’t have to be a nightmare. Your lender is your friend; go back and talk to the person who helped you get your home and see what advice they can provide.

Laira Martin contributed to the reporting for this article.