What Is an Underwater Mortgage and What Are Your Options?

If you’re underwater on your mortgage, that means you owe more on your home than it’s worth. That’s not a situation any homeowner wants to be in, but it happens to more people than you may think!

If you owe more on your home than it’s currently worth, it’s easy to feel overwhelmed and stressed. That’s totally normal. Just know that there are millions of Americans who have been where you are—and they’ve gotten through it. You’ve got options, and we’ll walk you through the ones we recommend.

Here’s everything you need to know about underwater mortgages: what an underwater mortgage is, how to know if you have one, and what you can do about it.

What Is an Underwater Mortgage?

First, an underwater mortgage is a mortgage loan that’s more than the current value of the property. It’s really that simple.

For example, let’s say you bought your house two years ago and you owe $200,000 on your mortgage. Everything was fine until home values started trending down in your area. Now your home (that you still owe $200,000 on) is only worth $185,000.

Your mortgage is $15,000 more than your home’s value. Because you owe more than your home is worth, your mortgage is considered "underwater." Sometimes you’ll also hear the term "upside-down" to describe an underwater mortgage.

An underwater mortgage is a mortgage loan that is more than the current value of the property. Sometimes you’ll also hear the term "upside-down."

Underwater mortgages became really common after the housing crisis in 2008, when home values plummeted and homeowners with adjustable rate mortgages could no longer afford their payments. A decade later, more than 9% of homeowners are still underwater. That’s a lot better than it was years ago, but 9% of homeowners means we’re talking about 4.5 million Americans.⁽¹⁾

That’s a lot of people.

How to Know if You’re Underwater on Your Home

Figuring out if you have an underwater mortgage isn’t complicated. Take a deep breath and follow these three simple steps:

1. Determine how much you still owe on your mortgage. You can find this on a recent mortgage statement or your online account. If you can’t find it, you can always get this information from the company who holds your mortgage loan.


2. Find out how much your home is worth. There are several ways you can determine the value of your home, but some will be more accurate than others. If you just want an estimate, you can talk to an experienced real estate agent in your area. For a more concrete figure, your best bet is to hire an appraiser.


3. Subtract the amount you owe (step 1) from your home’s current value (step 2). Like we already talked about, if you owe $200,000 on your mortgage, but your home is only worth $185,000, you’re underwater on your home by $15,000.

What Are Your Options if Your Mortgage Is Underwater?

Being underwater on your home is scary. You may feel overwhelmed, but trust us—that’s not the end of your financial story! You still have options that can help you turn things around! We’ll walk through some of the most common scenarios and which ones are your best options.

Option 1: Stay in your home and work to build more equity.

Staying in your home and paying it off slowly takes a lot of patience and discipline—we won’t sugarcoat it! You may need to take on another job or get your side hustle going to increase your income. It may mean cutting your budget down to the basics and putting all of your extra income toward your home.

Pay off your home faster by refinancing with a new low rate!

But here’s the great part. Once you’ve paid down more of your principal, you’ll start to see the light at the end of the tunnel. And you won’t lose your home.

Once you’ve paid down more of your principal, you’ll start to see the light at the end of the tunnel. And you won’t lose your home.

Take Julia and Todd R., for example. As a result of the housing crisis in 2008, their home value dropped significantly. At its lowest point, the house was worth $40,000 less than what they had paid for it. On top of that, they had an adjustable rate mortgage, which means that their payment climbed as their interest rate increased. It was completely overwhelming!

They could have given up and defaulted on their payments, but they loved their home and decided to dig in. After knocking out all of their consumer debt to free up their income, they started throwing more and more money at their mortgage.

Thanks to their hard work, they had enough equity in their home to refinance a few years later. They chose a 15-year fixed-rate mortgage with a payment they could actually afford—one that wouldn’t fluctuate as interest rates went up and down. Now, with affordable mortgage payments and equity in their home, they’re on the right track to build wealth and leave a legacy for their family!

Getting back right side up on your home takes hard work, but it’s one of the best ways to ride the ups and downs of the real estate market. Use our mortgage payoff calculator to run the numbers for your specific situation. The more money you can pull together to pay down principal, the faster you build equity in your home. It’s that simple!

Getting back right side up on your home takes hard work, but it’s one of the best ways to ride the ups and downs of the real estate market.

Option 2: Refinance your mortgage.

OK, let’s be super clear on this part: You can’t actually refinance your home when you owe more than it’s worth. Most lenders won’t allow traditional refinancing until you have at least 20% equity in your home.

However, if you’re underwater on your home, you may qualify for the HARP program. This program was created in response to the 2008 housing crisis, and it gives you a way to refinance if you’re upside down on your home.

To qualify you must have made on-time mortgage payments over the past six months (and no more than one late payment in the past 12 months). It also only applies to homeowners with loans that were originated before May 31, 2009, that have less than 20% equity.

If you’re interested in this option, make sure you’re getting guidance and advice from a trusted lender. We’ve worked with Churchill Mortgage. They can walk you through the process and make sure you meet the criteria for a HARP-backed mortgage.

Option 3: Sell your house and use your savings to pay the amount you still owe.

The first two options—paying more on your mortgage or considering a refinance—assume that you’re staying in your home. And just to repeat, that’s your best option if you’re underwater. When you stick with it, you can benefit from the market conditions improving and driving your home’s value back up. It may be a wild ride, but you don’t actually lose money.

But there are other scenarios—and one is to sell your home. Now, when you sell while your home value is down, you do lose money. The only way you can sell your home through a normal home-selling process when you’re underwater is if you have cash on hand to make up the difference between how much you owe and how much your home is worth.

Here’s what we’re talking about: Let’s say you owe $200,000 on your house, but it’s only worth $185,000. If you have $15,000 to pay the lender plus the money you need to cover the real estate commission (typically 6% of the purchase price), you can sell your house. You’ll just end up losing a lot of money in the process.

So while this is an option you have, we think we can all agree that it may not be your best bet.

Option 4: Sell your home through a short sale process.

A short sale is only an option when you can’t afford your monthly mortgage payments, your home is worth less than your current mortgage balance, and you don’t have cash on hand to make up the difference.

In a short sale process, the lender has to agree to sell your home for less than what you owe on it. This isn’t a great situation for them (because they lose money), so they will only consider this option as a last resort before a foreclosure.

If you want to sell your home through a short sale process, you’ll have to prove to your lender that you can’t afford your monthly payments and have no way to catch up. If they agree to consider a short sale offer, you need to partner with a real estate agent who has experience in short sales to get your home on the market.

As the seller, you negotiate the terms with a potential buyer, but ultimately, your lender makes the final call on whether or not an offer gets approved. That means the process really isn’t in your control, and it can take a long time to actually get your home sold.

If it sounds like this option really stinks, it’s because it does. A short sale isn’t great, but the next option, a foreclosure, is even worse – for you and the lender.

Option 5: Foreclose on your home.

In a foreclosure situation, the lender takes control of your home because you are unable to make your payments. If you’re still living in your home, you’ll be evicted. Then the lender will sell the house as quickly as possible to try to recoup as much money as they can. That’s not something you want to go through!

Do everything you can to avoid a foreclosure. You don’t want to experience the emotional stress of forcibly losing your home. And on top of that, you’ll typically have to wait seven years before getting another mortgage. If you can’t afford your home, a foreclosure should really be the very last option—after you’ve tried everything else.

Do everything you can to avoid a foreclosure. You don’t want to experience the emotional stress of forcibly losing your home. And on top of that, you’ll typically have to wait seven years before getting another mortgage.

Option 6: Declare bankruptcy.

Like a foreclosure, declaring bankruptcy takes a huge emotional toll. This is another last resort option that you only want to pursue if you’ve tried everything else. And we mean, everything else. It may seem like an easy way out of your financial problems, but trust us, it’s anything but easy.

There are two different types of bankruptcy:

• Chapter 13 means the court will put you on a plan to repay some or all of your debt. You’ll have time to work on getting your mortgage current. The court will monitor your budget, and your repayment plan will typically last for three to five years.


• Chapter 7 means all (or most) of your assets will be sold by the court to repay your debt. That means it’s possible for you to lose your home, cars or other assets. Any remaining debt is forgiven.

Filing bankruptcy is expensive, emotional and exhausting. And the consequences stick with you for years. It should be the very last resort—after you know you’ve tried every other possible option.

Talk to a Professional

Knowing you’re underwater on your home can be really stressful. You’re worried that your home value won’t climb back up, and on top of that, you may feel like you’re drowning in unaffordable mortgage payments. If that’s you, take a deep breath and trust us. You’re going to be okay.

You can get through this, and there are people who can help you!

Don’t be afraid to reach out to a trusted real estate agent in your community who can help you determine your home’s value. They can help you know if you’re truly underwater. They’ll also have a pulse on the current market conditions and how long it might take for your home value to increase.

If you need help weighing your options, call our friends at Churchill Mortgage. You don’t have to figure this out by yourself. We’ve worked with them for over two decades, and you can trust their advice.

Remember, there are lots of people just like you who have been underwater on their homes and gotten through it. You can too!