What Is An Underwater Mortgage?

What Is An Underwater Mortgage?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated January 20, 2022

When your mortgage loan amount is higher than what your home is worth, your mortgage is considered “underwater”. Having an underwater mortgage can be risky and a hassle to deal with as it can affect your ability to refinance your mortgage or sell your home. 

Let’s take a closer look at what it means to be underwater on your mortgage and what you can do to get above water. 

What Is An Underwater Mortgage? 

An underwater mortgage is a mortgage where the homeowner owes more to the lender than what the home is worth. This can happen when the homeowner’s property value depreciates after purchasing the property. 

When this happens, the homeowner might not have any equity in the home. This can negatively affect a person’s available credit and prevent the borrower from refinancing the mortgage. The homeowner may not even be able to sell the home without putting in their own cash to cover the losses. 

What Causes An Underwater Mortgage?

There are two key reasons why mortgages wind up underwater: Depreciation in value and missed mortgage payments.

Depreciation In Value 

While real estate tends to increase in value over the long run, there may be times when value dips for a certain amount of time. Here are some reasons why.

Excess Supply Of Homes

A drop in home prices can happen when there’s an excess supply of homes available for sale in your area and not as many buyers looking. In this case, there is little demand for homes, and home prices can dip in response to attract buyers.

High-Interest Rates

Home prices might also dip because of very high-interest rates. When interest rates increase, it increases the cost of getting a mortgage, which can deter buyers from taking out a mortgage to buy a house. Again, this can result in a cooler market where there’s not as much demand as would be needed to fuel home prices. 


When the economy is weak, consumer spending may lag. Not only are people less likely to spend money on everyday things, but they’ll also be less likely to buy a home. In this scenario, demand for housing can drop, leading to a subsequent dip in property values.

During these periods, mortgages with a very high loan-to-value (LTV) ratio — which is the loan amount borrowed relative to the appraised value of a home — may be at risk of ending up underwater. 

To illustrate how this can happen, let’s say you take out a $450,000 mortgage to finance a $500,000 home. 

After a couple of years, the home was appraised at $425,000 due to lack of demand in the real estate market. Even after keeping up with your mortgage payments, you still owe $430,000 on your mortgage, which means now you owe $5,000 more than what the home is currently worth. 

Missed Mortgage Payments

You can also send your mortgage underwater if you miss your mortgage payments. 

Early on in your mortgage, a larger share of your mortgage payments goes towards the interest portion of your loan. With every mortgage payment you make, less and less goes towards interest, while an increasing amount is contributed to paying down the principal. 

Missing a mortgage payment means that the interest that was not paid will accumulate. Since mortgage interest rates are compounded, it will be more difficult for you to repay your loan because of a missed mortgage payment. 

How Missed Payments Can Cause Your Mortgage To Go Underwater?

Let’s say you borrowed $450,000 to purchase a home worth $500,000 with a 30-year fixed-rate mortgage at a rate of 3.75%. On your first mortgage payment, you owe $2,149. Out of that amount, $1,406 goes towards interest, and the rest pays down your outstanding principal.

If you miss your mortgage payment, that means that the additional interest amount will continue to accumulate at the 3.75% interest. If you don’t make up for that missed payment the next month and miss additional payments from time to time, you’ll inch your way closer to going underwater on your mortgage. 

How To Check If Your Mortgage Is Underwater?

3 Steps To Check If Your Mortgage Is Underwater

1. Verify Your Outstanding Loan Balance

Find out what you still owe on your mortgage, which you can do by looking at a recent mortgage statement or by checking your mortgage account online.

2. Find Out What Your Home is Worth

You can get a rough idea of what your home is currently valued at by doing an online search. You can visit a real estate website and type in your location to see what other properties like yours are being sold for. If you want a more accurate estimate, you may want to consider hiring an appraiser to come and evaluate your home and tell you exactly what your home is currently worth in today’s market.

3. Subtract Your Loan Balance From Your Home’s Value

To find out if you owe more on your mortgage than what your home is currently worth, subtract your mortgage balance from the property value. If you still owe $450,000 on your mortgage, for instance, and your home is only worth $425,000, then your mortgage would be considered underwater by $25,000.

How To Get Out Of An Underwater Mortgage?

The sooner you find out that you’re underwater on your mortgage, the better. This will give you time to take steps to get yourself out of this situation.

Option 1 . Refinance Your Mortgage 

Refinancing involves replacing your current mortgage with a new one on different terms. But to qualify, you’ll likely need to have some equity in your home first, as lenders typically don’t allow mortgage refinancing on an underwater loan. 

Rather than parting with your mortgage, you’d be better off making payments on your loan until you build enough positive equity to refinance. 

Option 2. Stay In Your Home

Consider whether or not you think property values will increase in the near future. In this case, you may be able to build some home equity over the next little while as the value of your home appreciates. Even the slightest increase in home values can make a big difference.

Also, think about your income and whether or not you think you’ll be able to financially contribute to making up lost ground in terms of property value versus your outstanding loan balance. If your income increases in the near future, you may be in a better position to pay your home loan faster and get yourself out of an underwater situation.

Option 3. Sell Your House 

If you don’t see any way for your home to increase in value in the next little while or your income can’t support additional mortgage payments, it might be time to sell. However, you’ll only be able to sell your home with an underwater mortgage if you have enough cash available to make up the difference between the amount you still owe and the value of your home.

Option 4. Sell Through A Short Sale

Another way to get yourself out of an underwater mortgage is to go through a short sale. This process involves selling your home for less than what you owe on your mortgage and asking your lender to forgive the difference. You’ll need to work with a real estate agent who is experienced in short sales to boost the odds of getting approved by a lender and finding a buyer.

Option 5. Ask Your Lender For Help 

If you don’t want to sell your home, ask your lender if they would be willing to reduce your principal amount. In this case, your lender would lower your overall loan amount, which they may be open to in order to avoid a costly foreclosure process.

Option 6. Deed-in-Lieu Of Foreclosure

A deed-in-lieu of foreclosure involves signing the deed to your home to your lender and in exchange are alleviated of your mortgage obligations. This might be beneficial for both you and your lender because it can help avoid foreclosure, which is a hassle for lenders.

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How To Avoid An Underwater Mortgage? 

The best way to avoid an underwater mortgage is to save up for a large down payment. 

A very small down payment puts you at greater risk of ending up underwater on your mortgage if home prices decline shortly after you buy your home. This can be exacerbated by the mortgage default insurance that you’ll have to pay if you put down less than 20% when you first take out your mortgage. The less you put down, the higher your premiums will be.

For instance, let’s say you buy a home for $500,000 and make a 10% down payment ($50,000). At that rate, you would be required to pay a 3.10% premium on the total loan amount. With a $450,000 mortgage ($500,000 – $50,000), your mortgage default insurance premium would come to $13,950 ($450,000 x 3.10%). 

If you roll this amount into your mortgage, you’ll owe 93.10% of the price you paid for your home (the original 90% + the additional 3.10% for default insurance). 

The lower the amount that you owe on your mortgage compared to what your home is valued at, the better. You’ll be at less risk of finding yourself underwater on your mortgage, so do your best to put down a large payment when you first apply for a mortgage. 

Bottom Line

If you have a mortgage, be sure to keep tabs on it, as well as the value of your home. If you find that what you still owe on your mortgage is very close to the value of your home, take immediate steps to rectify the situation to avoid the headaches that come with an underwater mortgage.

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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