Many people think owning a home is always a good investment. While that’s often true, there’s a risk that you could end up with an underwater mortgage.
But what is an underwater mortgage exactly? This is when your home value falls below the amount you owe on your mortgage, meaning you have negative equity in your home. It can make it harder to sell, refinance and build wealth, and may even lead to foreclosure in some cases.
However, by understanding underwater mortgages and how they happen, you’ll better understand how to navigate this tough position.
What Is an Underwater Mortgage?
An underwater mortgage — also called negative equity or an upside-down mortgage —means you owe more on your home loan than what the property is currently worth.
Some common causes of an underwater mortgage include:
- Declining property values
- Overpaying during a housing bubble
- High-interest loans
- A small down payment
- Missed mortgage payments
If your home value falls but the loan balance stays the same, it could lead to financial hardship if you can’t afford your mortgage payments.
How to Know If Your Mortgage Is Underwater
If you’re wondering if you have an underwater mortgage, here’s how to find out:
- Check your current mortgage balance: Look at your latest mortgage statement or log into your loan servicer’s website to see how much you owe on your home loan. Make sure to add home equity loans or lines of credit as well.
- Estimate your home’s value: Check real estate websites (like Zillow or Redfin) to get a ballpark figure of how much your home is worth. However, if you want the most accurate estimate, you should schedule a professional home appraisal.
- Compare the numbers: If your mortgage balance exceeds your home’s market value, your mortgage is underwater.
Example: You owe $250,000 on your mortgage, but your home’s market value is $235,000. That means you’re $15,000 underwater on your home loan.
But what happens if your house is worth more than your mortgage? Well, that’s good news! It means you’ve built equity in your home, and you’re on the right track.
Challenges of Having an Underwater Mortgage
Being underwater on your mortgage can make homeownership more stressful. Here are some challenges you could face:
- Difficulty selling the home: When you sell your home, the money from the sale goes toward your remaining mortgage balance. If it’s not enough to cover the full balance, however, you’ll have to bring extra money to closing.
- Harder to refinance: While some options are available if you’re underwater, most lenders require you to have some equity in your home before you can refinance.
- Risk of foreclosure: If you face financial hardship (like losing your job) and can’t make your house payments, selling may not be an option, meaning the home could be at risk of foreclosure.
- Long-term financial strain: If home values don’t recover, it could lead to stalled financial progress. For example, you can’t tap into your equity for home improvements or debt consolidation.
Options for Homeowners with an Underwater Mortgage
Even if your mortgage is underwater, there are still several ways you can manage the situation depending on your finances and long-term goals.
1. Stay and Keep Making Payments
If you can comfortably afford your mortgage payments, it’s typically best to stay in the home and continue paying down your home loan.
This strategy gives your home value time to recover, possibly restoring your equity. During this time, consider making additional payments toward your principal to reduce your loan balance and increase your ownership stake.
2. Refinance Through Special Programs
Even if you were turned down for refinancing due to an underwater mortgage, you may qualify for some government-backed refinancing options:
- FHA streamline refinance: This option requires no appraisal or income verification and can lower monthly mortgage payments for FHA loan borrowers.
- VA interest rate reduction refinance loan (IRRRL): An IRRRL helps eligible veterans get a lower interest rate to reduce monthly mortgage payments or move from an adjustable rate to a fixed-rate mortgage.
- Freddie Mac and Fannie Mae’s high LTV refinance options: These programs are temporarily paused but allow some underwater homeowners with high loan-to-value (LTV) ratios to refinance.
3. Sell the Home Through a Short Sale
With a short sale, you can sell your home for less than what you owe. However, this option requires your lender’s approval.
Although a short sale will likely impact your credit score, it’s often less damaging than foreclosure.
4. Negotiate a Loan Modification
You can also ask your lender about a loan modification. Some lenders may work with you to reduce your interest rate, extend your loan term or even forgive part of your principal.
A loan modification may make your payments more affordable and reduce your mortgage rate without refinancing, allowing you to stay in your home.
5. Consider a Deed In Lieu of Foreclosure
As a last resort, you can voluntarily hand over your home to the lender to satisfy the debt. A deed in lieu of foreclosure may help you avoid the formal foreclosure process.
A deed in lieu will still hurt your credit score, but likely not as much as a foreclosure.
Pros and Cons of Different Underwater Mortgage Solutions
Below is a quick overview of different solutions to an underwater mortgage, along with the benefits and drawbacks of each.
| Solution | Pros | Cons |
|---|---|---|
| Keep making payments | Avoids credit damage, could regain equity | May take years for home value to rebound |
| Refinance | Can lower payments and interest rate | Not all homeowners qualify |
| Short sale | Helps avoid foreclosure | Hurts credit and requires lender approval |
| Loan modification | Keeps you in your home with lower payments | May extend loan term and increase total interest |
| Deed in lieu | Avoids foreclosure process | Credit impact, loss of home |
How to Prevent an Underwater Mortgage in the Future
Although you can’t always predict what the housing market will do, these strategies could reduce the risk of an underwater mortgage:
- Make a larger down payment when buying a home (ideally 20% or more of the purchase price).
- Choose a fixed-rate mortgage for predictable payments.
- Avoid borrowing more than the home is worth.
- Monitor your home’s value and mortgage balance.
- Refinance early if mortgage rates drop and you have equity.
Final Thoughts to GO: What to Do If Your Mortgage Is Underwater
Being underwater on your mortgage can be stressful, but it’s important to assess your financial situation before making a decision.
If you can afford the payments, waiting for home values to rise may be the best option. This gives the market time to recover while you build equity.
However, if you’re struggling financially, make sure to explore all your options, including refinancing, a short sale or a loan modification.
Need help exploring options? Reach out to a HUD-approved housing counselor, contact your lender or check out our homeowner resource hub to take the next step.
FAQs About Underwater Mortgages
Here are some common questions that come up while looking more into underwater mortgages:- How do I check if my mortgage is underwater?
- You can visit real estate websites like Redfin, Zillow or Realtor.com for a rough estimate. However, if you want a more accurate assessment, you'll need to hire a professional appraiser.
- Can I refinance if my home is underwater?
- Your refinance options will likely be limited since most lenders require a certain amount of equity. However, you may still be able to refinance through programs, such as an FHA streamline refinance or VA IRRRL.
- Will an underwater mortgage affect my credit score?
- As long as you keep up with your mortgage payments, an underwater mortgage won't affect your credit.
- Is selling my home an option if I owe more than it's worth?
- Yes, you can sell your home through a short sale with your lender's approval. While it will impact your credit, it won't hurt it as much as a foreclosure would.
- What happens if I stop paying my mortgage on an underwater home?
- Missing your payments can lead to foreclosure, which can damage your credit significantly and make it more challenging to buy a home in the future. However, in some cases, it might be worth it to walk away from your mortgage.
Information is accurate as of May 9, 2025.
Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.