The Upside-Down or Underwater Mortgage

By | October 4, 2021

You may have heard a lot of talk and news stories about homeowners having “upside-down” or “underwater” mortgages. But what’s that really mean?

When you are upside-down or underwater in your home loan or mortgage it means that you owe the bank or lending institution more money than your home is currently worth. There is probably nothing you did to directly get into that situation: it’s simply a turn or change in the value of your home over time. And being upside-down in a home loan is not always all that bad.

Here’s how you might end up underwater with a mortgage:

  • 1. In 2005 you bought a house for $200,000. You borrowed all that money from the bank, so you owe the bank $200,000. But you’ll pay it back a little bit each month with a 30-year mortgage.
  • 2. In 2009 it’s four years later and you’ve paid back about $20,000 so far. You still owe the bank $180,000. You still have the next 26 years to pay it back. No problem.
  • 3. In 2009 you check an online home-value site like Zillow.com and you find that all the home prices in the country have dropped over the last few years. Your home is now worth approximately $150,000. That means if you were to try to sell it today you would probably only find buyers willing to pay about $150,000 for your home.
  • 4. Because your potential selling value is $150,000 and you still owe the bank more than that ($180,000) it is said that you are “underwater” with your mortgage.

A lot of homeowners get pretty freaked out about this, but it really isn’t all that bad.

Whenever you buy a new car from a dealership you are almost immediately “underwater” with the car loan the moment you drive it off the lot. If you buy a new car for $20,000 and then try to sell it back to the car dealer a day later you’ll find that the dealer will only give you about $15,000 for it. You had to borrow $20,000 to buy it, but the car is now only worth $15,000. You’re “upside-down” in your car loan.

Also Read: Four Ways To Modify A Home Loan

When you’re upside down in any sort of loan your payments don’t change, the amount of money you owe doesn’t change and your home is not worth any more or less because of the situation of your loan. You can continue living in your home and making regular mortgage payments just like before.

In fact, there is a slim chance that your monthly payments may actually get a little lower because your tax situation may change: if your home’s value is less than it was before there’s a chance your local town or state may lower your property taxes!

And, as long as you stay in your home and keep paying the mortgage there’s a good chance that in time your home’s value will grow while the amount of money you owe the bank will obviously get lower. At some point, your home will once again be worth more than you owe.

The only time when an upside-down or underwater mortgage is a problem is when you are trying to sell it. If you owe $180,000 and you sell your home for $150,000 then you’re going to end up with no home and still owing the bank $30,000. That’s not a good thing, so if you’re in that situation you have a few options:

1. Delay Selling Your Home – Underwater Mortgage

If you can stay in your home for another six months or a year you may find that the home prices in your area have changed. Home prices could go up, but they could also go down. As long as you’re still making mortgage payments, you’ll have a place to live.

2. Increase Your Home’s Value – Underwater Mortgage

This isn’t always easy to do, but sometimes home improvements, repairs or even basic landscaping jobs and minor home changes can increase your home’s value enough to make it worth more than you might owe the bank. Some people have even taken out small home improvement loans to increase the curb appeal of their homes so that they can then turn around and sell them for a higher price. The key is to make sure that you sell it for enough money to pay off your mortgage and your improvement loan.

3. Sell Your Home For a Loss: This is generally not a good option because in the end you won’t have a home and you’ll still owe the bank some money. Underwater Mortgage This may be something you want to do if you’re combining households with someone else and the taxes on the home you own are more expensive than you can afford. Some people will move in with another person and sell their home as a loss just to reduce their property tax bills.

The Upside-Down or Underwater Mortgage
The Upside-Down or Underwater Mortgage

3. Walk Away From Your Home: If you’re really unable to pay the monthly mortgage and you definitely can’t sell it then you can “walk away” from your home and your mortgage obligations. You literally pack up and move out, informing the bank that you can’t pay the mortgage anymore.

This will obviously destroy your credit score, which could make life difficult for you, especially since things like this tend to have a rippling effect and often last much longer than intended. Still, it is an option and if you’re given the choice between eating and walking away from your home, the home usually loses.

Being underwater or upside-down in your mortgage or home loan shouldn’t always be seen as a negative. It can often be seen as a positive reason to stay in a home Underwater Mortgage or neighbourhood. Studies have shown that the longer the same people stay in the same neighbourhood, the more sense of community and belonging everyone will have.

Even if your home loan is upside down, your life doesn’t have to be!

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