What's an Underwater Mortgage?

An “underwater” mortgage is when the balance of the mortgage loan is higher than the fair market value of the property.

An “underwater” mortgage is when the balance of the mortgage loan is higher than the fair market value of the property. This type of situation became common following the housing market crash that occurred in the late 2000s when many homeowners saw their homes lose a considerable portion of their value.

An Example of an Underwater Mortgage

Let's say you owe $500,000 on your loan, but the market value of your home is only $475,000. Your mortgage is $25,000 more than the value of your home. In this case, your mortgage is underwater.

How to Figure Out If You're Underwater

Here are the steps to take to determine whether you owe more than your home is worth.

Step 1

First, figure out how much you owe on your mortgage loan (or loans).

How to find out what you owe. To find out approximately what you owe, get a copy of your most recent mortgage statement (or go online) and look for the unpaid principal balance. The unpaid principal balance includes only the amount of the loan that is unpaid. It doesn't include interest or outstanding charges—like late fees or foreclosure-related charges—that you owe now or would owe in the future. For a statement of exactly how much you would need to pay off the loan, you can request a payoff statement from your mortgage servicer, which will include the unpaid principal balance plus interest and fees.

How to request a payoff statement from your servicer. You can request a payoff statement by calling your mortgage servicer or, in some cases, by making your request online. The payoff statement will include precisely how much you must pay by a specified date in order to fully satisfy the debt. It will include any interest you owe through a certain date, and any other fees you have incurred and not paid. (Learn more about payoff statements.)

Don’t forget to include your other mortgages in the total when determining whether you’re underwater. If you have a second mortgage on your home, be sure to find out how much you owe on that mortgage as well. Then add the total amount you owe on the second mortgage to the first mortgage amount. For example, if you owe $500,000 on your first mortgage and $10,000 on the second, add the figures together and your total mortgage debt is $510,000.

Step 2

Next, determine the current market value of your home. To do this, you can:

  • hire an appraiser (although this can be expensive)
  • speak to one or more local real estate agents to find out what they think your home is worth, and/or
  • look online to review the sale prices of comparable houses that recently sold in your neighborhood to come up with an estimated value of your home.

Where to find out the sale prices of nearby, similar homes. You can find out the sale prices for similar homes in your area at www.zillow.com. Run a search for your area and select the “Recently Sold” option to view sale prices. Look for homes that recently sold in your neighborhood and are similar to yours in terms of square footage, number of bedrooms/bathrooms, and features, to figure out an approximate value of your home.

Zillow will also give you an estimate (called a “Zestimate”) of what it thinks the current market value of your home is based on the data it has in its system gathered from public records and information entered by users. Be aware, however, that this number could be way off. Zillow uses an automated system and cannot account for variations such as special features, location, maintenance needs, and market conditions.

Step 3

Take your home’s current market value and subtract your total mortgage debt. If you get a negative result, your mortgage is underwater.

As in the example above, say your total mortgage debt is $510,000. Based on your own research and after speaking to several real estate agents, you determine the likely market value of your home is $475,000. Take $475,000 and subtract $510,000. You get a negative $35,000. This tells you that you’re underwater by $35,000.

Problems Caused by Underwater Mortgages

Underwater mortgages can pose problems in several situations.

Difficulties in Selling Your Home

An underwater mortgage makes it difficult for homeowners to sell their house. Buyers generally will only pay market value for a home, but if the property is underwater, the sale price won’t be enough to pay off the mortgage debt. This situation makes it difficult, if not impossible, to sell a property that is underwater.

Even if the lender agrees to a short sale, the homeowner might get saddled with a deficiency judgment. (Learn more about short sales and deficiency judgments following short sales.)

Not Able to Refinance

An underwater mortgage also often prevents a homeowner from being able to refinance the debt. Underwater homeowners are typically unable to get a new loan with more favorable terms—like a lower interest rate—if the current value of the property is not enough to act as security for a new loan that is sufficient to pay off the existing mortgage.

Higher Risk of Foreclosure

If a homeowner needs to sell the home or refinance because the monthly payments are too high, but can't do so, there's a high risk that the home will go into foreclosure. (To learn more about how foreclosure works in your state, see Nolo's Key Aspects of State Foreclosure Law: 50-State Chart or check out your state's page in our State Foreclosure Laws area.)

Getting Help

If you're facing a foreclosure and need more information about how to the process works where you live or want advice about what to do in your particular situation, consider contacting a foreclosure lawyer. If you need information about different ways to avoid a foreclosure, like with a loan modification, short sale, or deed in lieu of foreclosure, consider talking to a HUD-approved housing counselor.

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