How to Define "Underwater Mortgage"

An underwater mortgage may happen if home values go down.

An underwater mortgage may happen if home values go down.

Tough economic times make it necessary for many consumers to learn hard financial lessons. In a difficult housing market with real estate falling in value, some homeowners are finding themselves in a mortgage situation they could not predict or foresee when they originally contracted for their home loans. If you hear the term “underwater mortgage,” pay close attention to learn what this financial term means and how it may affect you personally.


Think about what visualizations the term “underwater mortgage” brings to mind. If someone is underwater, he may be struggling to breathe and struggling to rise above the surface of the water again, while fighting currents in the water.


Learn the basic definition of an underwater mortgage. A homeowner who has greater debt (larger mortgage amount) than her house is worth (as defined by the current market value of the home) has an underwater mortgage.


Understand that this situation occurs sometimes if a homeowner refinances a mortgage. After a homeowner accrues some equity in his home, a lender may allow the homeowner to borrow additional money from this equity. If a homeowner has a significant amount of equity, the mortgage should stay properly balanced. If a homeowner does not have significant equity, the refinance may cause the mortgage to go underwater. A mortgage can become underwater also if home values go down. If homeowners purchase a house with high property value and then the market shifts downward, homes will not be worth the amount of the mortgage, and the mortgage becomes underwater.

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