Navigating an Underwater Mortgage: Options for Homeowners

Cartoon image of a two-story house sinking underwater with a distressed homeowner standing on the roof to avoid the rising water.

Navigating an Underwater Mortgage: Options for Homeowners

Finding yourself underwater on your mortgage can feel like treading water without a shore. But don’t lose hope—there are solutions.


An underwater mortgage is when you owe more on your home loan than your property’s current market value. With home values fluctuating and interest rates rising, many homeowners have negative equity through no fault.


While an underwater mortgage presents challenges, you have options to avoid drowning in debt. This blog covers what causes negative equity, the consequences, and, most importantly—what homeowners can do about it.

What Puts You Underwater on Your Mortgage?

  • Falling home values – If you bought at the peak and prices dropped, your home may now be worth less than you paid. Regional economic factors can cause declines.
  • Overvaluation – Overly optimistic appraisals when purchasing can lead to owing more than the home’s worth. Working with a reputable appraiser helps avoid this.
  • High-interest rates – Higher rates mean more of your payment goes to interest instead of principal. This slows equity building, making it harder to refinance later.
  • Large down payment – If you put down 20% or more and home values decrease, you lose a larger share of your invested cash.

The Downstream Effects

Being underwater on your mortgage drags you down through:

  • Financial stress – You may be stuck paying more than it’s worth with no way to tap equity. This can mean cutting expenses or taking on more income.
  • Credit score damage – Missed payments lead to late fees, defaults, and foreclosure. These all cause lasting harm to your credit.
  • Emotional toll – Dealing with unmanageable debt affects mental health and relationships. But you don’t have to shoulder it alone.
  • Legal implications – Walking away from an underwater mortgage is more complex. Foreclosure stays on your record for years, and debt settlement is still required.

Your Options for Surfacing

Though challenging, having an underwater mortgage is navigable with a life preserver of options:

  • Continue paying, if possible. Maintaining payments avoids credit damage and foreclosure.
  • Rent out your property to generate income to cover the mortgage. AirBnB unused rooms or suites for additional cash flow.
  • Seek a loan modification to reduce payments through lower interest rates or longer terms.
  • Refinance for better rates/terms, but know closing costs and credit impacts.
  • Sell via short sale – lender approves sale even if under mortgage amount to avoid foreclosure.
  • Sell your home to an investor “subject to” your existing mortgage – This allows you to hand over the title and all mortgage obligations to the buyer while moving on debt-free. Make sure to consult professionals for your specific situation before utilizing this method.

Light at the End of the Tunnel

An underwater mortgage can feel inescapable, but solutions exist. Being proactive, researching options, and seeking professional advice will help you stay afloat until you reach calmer waters.


With persistence and using all resources available, you can avoid sinking underwater on your mortgage. The situation is challenging but navigable, so keep hope.

Some Commonly Asked Questions

Compare your current mortgage balance to the estimated market value of your home. If you owe more than it’s worth, your loan is underwater. Getting a professional appraisal can confirm.

Requirements vary by lender, but you typically need a credit score of at least 620 to qualify for refinancing. The higher your score, the better the terms you can obtain.

You can unlikely take out a second mortgage if you currently have negative equity. Lenders want sufficient collateral, so your loan-to-value ratio would need to be lowered.

If you can still afford payments, continuing to pay your underwater mortgage is recommended to avoid foreclosure and further credit damage. Consider all options before walking away.

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