Are you spending more money than your property is worth? If so, it would seem that you have an underwater mortgage. This particular situation can be a massive headache to homeowners in these situations, especially if they wish to sell the property or refinance.

What is an Underwater Mortgage & What Does it Mean?Options for Selling With an Underwater Mortgage

An underwater mortgage, sometimes also referred to as an upside-down mortgage is a home loan with a higher principal than the home is worth. This oftentimes happens when property values fall, but you are still required to repay the original balance of your loan. However, mortgages aren't the only loans that can end up underwater.

How Does an Underwater Mortgage Happen?

There are two significant ways that mortgages can end up underwater:

  1. Decrease in property value.
  2. Missed Payments.

Here is a closer look into how these two things can happen.

Decrease in Property Value 

Changes in the real estate market can lower the value of your home. Natural disasters and climate change can lower your property value because the property is a greater risk to purchase. Certain foreclosures in the neighborhood can also drive down property value. When the value of a property falls below the outstanding balance on the mortgage, this is called negative equity, meaning you owe more on your home than it is worth.

Missed Payments

When you make payments on your loan, most of the money you pay goes toward interest. When you chip away at your principal balance, you pay less and less in interest. This process is called amortization, this is a way to pay off the debt in equal installments that include varying amounts of interest and principal payments over the life of the loan. If you fail to pay off your interest in one month, that interest will accumulate. Compounding interest can make it difficult to pay back your loan and may put you underwater.

The Trouble of Underwater Mortgages

Not having equity, or having negative equity, in your home can cause several problems not from being able to refinance to losing your home.


If you are underwater, it is impossible to refinance your home. Most lenders need you to have equity in your property before you refinance.


If your loan is underwater, you can have difficulty selling your home. You use the balance from the sale to pay down your existing mortgage when you sell your home. It can be difficult to get enough money to cover outstanding principal when you're underwater. This can leave you with only two options:

  1. Stay in your home and continue payments.
  2. Sell your home and cover the rest of your savings.

Potential of Foreclosure

Underwater mortgages can have higher chances of undergoing foreclosure. This can occur when you fall behind on payments and the bank seizes your home. If there is trouble making payment, you may need to foreclose and you can't refinance.

Signs Mortgage is Underwater

Here is how to know for sure if your mortgage is underwater:

Falling Local Property Values

Falling local property values are the first sign that your home is going underwater. When you know how much local homes are worth, compare this to the remaining principal on your loan. Requesting a payoff statement can also help determine how much you owe. A payoff statement will tell you how much is left on the loan, how much interest you currently owe, and the exact date you are slated to pay it off. If there is a major difference between your loan balance and the value of other homes in the area, there is a possibility you are likely underwater.

Low Appraisal

An independent appraisal is what you need if you want an exact idea of how much your loan is worth. An appraiser will look at the overall condition of your home, and how other homes are selling in the area. An appraisal is the most accurate way to understand what your home is worth. A comparison of the appraiser's estimate and the amount owed on the loan will show you if you are underwater if the appraiser's estimate is much lower than your loan balance.

You are Behind on your Payments

If your home is underwater, there is a good chance you have fallen behind on your monthly mortgage payments early on in your loan and you can avoid foreclosure if local property values are stable. Request a payoff statement, and compare the amount you owe with the loan amount you took out. If your current principal is higher than it was when you first took out the loan and your home has gone up in value, you are underwater.

Options For Homeowners Who Have An Underwater Mortgage

Continue Making Payments

If you can afford your monthly mortgage payments and don't plan on moving, the best thing to do is to wait it out and continue payments. Paying down your balance will help you get out of negative equity, giving your home time to appreciate its value. Over time, home values trend upwards. If it has taken a temporary hit, waiting some odd years can give you time to experience enough appreciation to get out from being underwater on your loan.

Sell Your Home

When a home is sold with a mortgage on it, the entire loan balance becomes due. Home sellers can use the proceeds from their sale to pay off the balance. If you are underwater, it is very likely you won't have enough to cover the full amount. However, if you cannot wait and there is a need to sell your home, you can always try to sell it and pay out of pocket whatever is left on the mortgage. If there are no funds to do so, you can talk to your lender about doing a short sale, which is where the lender accepts less than the remaining mortgage balance.

For more information on an underwater mortgage, and selling with an underwater mortgage, contact our office. We can help you sell your Forgotten Coast home or real estate quickly and efficiently.