Underwater Mortgage

Loading the player...

What is an 'Underwater Mortgage'

A home purchase loan with a higher balance than the free-market value of the home. This situation prevents the homeowner from selling the home unless s/he has cash to pay the loss out of pocket. It also prevents the homeowner from refinancing in most cases. Thus, if the homeowner wants to sell the home because s/he can't afford the mortgage payments anymore, perhaps because of a job loss, the home will fall into foreclosure unless the borrower is able to renegotiate the loan.

BREAKING DOWN 'Underwater Mortgage'

Underwater mortgages became commonplace in the aftermath of the 2000s housing bubble burst, and, combined with a bad economy, resulted in numerous foreclosures. In nonrecourse states, where mortgage lenders can't pursue borrowers for more money once their homes have foreclosed, many borrowers who could still afford their mortgage and other bill payments strategically defaulted on their underwater mortgages because they believed they were cutting the losses from a bad investment.

RELATED TERMS
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  2. Foreclosure - FCL

    A situation in which a homeowner is unable to make principal ...
  3. Term Payment Plan

    An option for receiving reverse mortgage proceeds that gives ...
  4. Home-Equity Loan

    A consumer loan secured by a second mortgage, allowing home owners ...
  5. Home Mortgage

    A loan given by a bank, mortgage company or other financial institution ...
  6. Delinquent Mortgage

    A mortgage for which the borrower has failed to make payments ...
Related Articles
  1. Investing

    Avoid Foreclosure: How To Handle An Underwater Mortgage

    Foreclosure is the biggest fear of any struggling homeowner. These tips just might save your credit rating.
  2. Personal Finance

    5 Worst U.S. Housing Markets

    If you are looking for a house, these tough markets might provide good prices and flexible sellers.
  3. Personal Finance

    Is Foreclosure Ever a Good Idea?

    Foreclosing on a home has major ramifications that can last for years, but for some, foreclosure may seem like the only option.
  4. Retirement

    Is A Reverse Mortgage Right For You?

    Home equity can be a viable financing alternative, but it depends on how you spend the funds.
  5. Retirement

    How Does A Reverse Mortgage Work?

    A homeowner who’s at least 62 years old can use a reverse mortgage to tap into her home’s equity for money. The house serves as the loan’s collateral. The loan is repaid when the homeowner dies, ...
  6. Personal Finance

    When (And When Not) to Refinance Your Mortgage

    There are both good and bad reasons to refinance. Learn more about both here.
  7. Personal Finance

    Will You Break Even On Your Home?

    Calculate how much your property will need to appreciate to cover the costs of owning it.
  8. Financial Advisor

    Reverse Mortgages: Right for Clients? Not Often

    Reverse mortgages are a legitimate vehicle for folks age 62 and up to tap into the equity in their homes for other uses. Here's what to consider with them.
  9. Personal Finance

    Your Mortgage: When It's Time to Walk Away

    Mathematically speaking, walking away can sometimes be the most prudent choice. Find out how to run the numbers.
  10. Retirement

    Reverse Mortgage Pitfalls

    Before tapping your home equity through a reverse mortgage, find out what could go wrong.
RELATED FAQS
  1. What are the requirements to apply for a reverse mortgage loan?

    For homeowners of a certain age who wish to stay in their homes but are finding it costly, a reverse mortgage could be the ... Read Answer >>
  2. What are the best ways to pay off my mortgage quickly?

    Learn how mortgage payments may be reduced and how to save thousands on mortgage loans by lowering the interest and principle ... Read Answer >>
  3. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
  4. Is homeowners' insurance required by law?

    Learn why it is always wise to protect your home with insurance even if it is not required. Understand how high-deductible ... Read Answer >>
  5. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  6. How can a reverse mortgage help wealthy and poor retirees?

    Learn about the ways a reverse mortgage can help both wealthy and poor retirees by allowing them to borrow against their ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center