An “underwater” mortgage is when the balance of the mortgage loan is higher than the fair market value of the property. By Amy Loftsgordon, Attorney. An "underwater" mortgage is when the loan balance is higher than the property's fair market value.
Lenders usually don't allow you to refinance a mortgage that is underwater — you need to have some home equity. Instead of walking away from the mortgage, your best bet is to make payments on the loan until you're in positive territory before refinancing.
"Underwater" is the term for a financial contract or asset that is worth less than its notional value. More commonly though, the term is used in relation to a house, or another substantial asset, which has an outstanding mortgage or loan on the asset that is a larger amount than what the asset is worth.
Keep up with your mortgage payments
Probably the best step you can take as a homeowner to prevent an underwater mortgage is to simply stay on top of your housing costs. As long as you're continually building equity in your home, you can minimize the risk of an upside-down loan.
Overall, the number of underwater homes is declining steadily. ATTOM Data said that 3.2 million homes — one in 18 mortgaged homes — were considered seriously underwater in the fourth quarter. That represented 5.4% of all U.S. properties with a mortgage, down from a 6.4% underwater rate a year earlier.
You can only sell a home that's underwater independently (without your lender's involvement) if you have enough cash to pay the difference between the sale price and what you owe. You'll also need to cover real estate agent fees and closing costs.
Your real estate agent or attorney can work with your mortgage holder and title company to prepare loan closing documents or a settlement statement. When the home is sold, those funds are used to pay the remaining balance on your loan and you can retain the remainder (if any) as profit on the sale.
A prepayment penalty is a fee you may have to pay if you sell before your loan is paid off. Prepayment penalties are less common than they once were, and some prepayment penalties only cover a specific period of time — say, if you sell within five years of buying.
While being upside down on your mortgage won't prevent you from selling your home, you will need to pay the difference between the sale price and the balance on your loan. So, if your home sells for $200,000 and you owe $225,000 on your loan, you'll need to pay the lender $25,000.
If you own your home outright — with no current mortgage — its value is all equity. You can tap that equity by taking out a loan against the home's value. There are several mortgage loan options available when you already own your home.
An upside-down mortgage is simply a mortgage in which the owner owes more than the house is worth. If you can afford the monthly mortgage payments and don't want to move, being upside down may not have an immediate effect.
If you fall behind on your mortgage repayments or default on your home loan, your bank may ultimately take possession your home and sell it to pay out your loan. This can be a stressful time for individuals and families, and it is important to understand the process and what rights you have as a borrower.
The HARP (Home Affordable Refinance Program) can help people refinance even if they owe more than the property is worth. Borrowers can refinance up to 125% of the home's value.
Equity is the difference between what you owe on your mortgage and what your home is currently worth. If you owe $150,000 on your mortgage loan and your home is worth $200,000, you have $50,000 of equity in your home.
The best way to avoid negative equity is to put down a large deposit, as much as you can afford when buying a new home. The larger your deposit, the smaller mortgage loan you'll need to repay. This can help to lower the chance that you'll end up with negative equity in your property.
Selling with a mortgage FAQs
Do I need to tell my mortgage company if I am selling my house? Definitely. You'll need to let them know and you'll also want their help to talk through the different options, unless you're using a separate advisor. Even so, they should be one of your first ports of call.
When selling a house when do you get the deposit? The deposit which is put down by the buyer at exchange won't be received by the seller until completion. Completion is the last part of the 'moving house process', where the full funds are sent over, the seller moves out and the buyer gets the keys and moves in.
You can also choose to rent out your old home to cover the mortgage on it or earn extra income to cover your new mortgage. You can also consider offering a lease-purchase option. In a lease-purchase contract, a portion of each month's rent from the tenant contributes to a down payment on your old home.
If you're redeeming your mortgage (repaying the amount off in full) and not buying another property, the sale price of your property must be higher than the amount remaining on your mortgage loan. When you sell your home, the proceeds from the sale are used to pay off your existing mortgage loan.
Yes, if you have enough equity in your current home, you can use the money from a home equity loan to make a down payment on another home—or even buy another home outright without a mortgage.
How Much Equity Do You Need? To determine the amount of equity you need when selling your home, you need to know your reasons for selling. If you're looking to relocate, then you will need about 10% equity. If you're looking to upsize to a bigger home, you will need at least 15% minimum equity.