What Is an Upside-Down Mortgage?: A Definitive Guide

About 65 percent of Americans are homeowners, but the vast majority of these people have an active mortgage.

There’s nothing wrong with having a mortgage. Most Americans can’t afford to buy a home in cash, leaving mortgage as the only viable path to homeownership. Even if you had the money to buy a house in cash, it’s still a savvier move to take a mortgage instead of paying for the property upfront.

However, taking out a mortgage has its fair share of disadvantages. For instance, you could end up with an upside-down mortgage. But what’s an upside-down mortgage?

In this article, we’re sharing all you need to know about this unique but all-too-common scenario.

What Does It Mean to Have an Upside-Down Mortgage?

An upside-down mortgage occurs when a homeowner owes more to the lender than the home’s worth.

Here’s is an illustration.

Let’s say you have a $250K mortgage. You’ve paid $150K, so the balance is $100K.

When you bought the home, its value was $250K. However, for some reason, its value is now $90K — $10K less than your mortgage balance.

In such a case, your mortgage is said to be upside-down or underwater.

What Causes a Mortgage to Be Upside-Down?

You’re probably wondering how on earth a mortgage ends up upside down. After all, when you buy a house, you expect it to keep increasing in value.

Well, there are a number of factors that can drive your mortgage underwater.

The most common cause is the economy. The Financial Crisis of 2008 is a perfect example of how economic forces can have a major impact on the real estate market. There was a large decline in home prices because of the collapse of the housing bubble, which was fueled by subprime mortgages.

Suddenly, homeowners who had mortgages found themselves with properties with less value compared to their mortgage balances.

2020’s COVID-19 pandemic is another example of how forces on the economy can affect the housing market. There has been a substantial drop in home values after the pandemic started, so it won’t be surprising to learn that some people now have upside-down mortgages as a result.

The condition of your property can also affect your mortgage. For example, if it undergoes substantial damage, perhaps because of a storm or fire, or another natural disaster, it will lose a lot of value. Especially if you hadn’t paid off more than 50 percent of the mortgage, it’s easy to find yourself with an upside-down mortgage.

What’s the Way Out of an Upside-Down Mortgage?

So, what do you do if you’re in an upside-down mortgage?

In truth, there’s only so much you can do. If you’re in this situation because of a poor economy, you just have to wait it out. Gradually, the economy will improve and home value will start to rise.

You could make some upgrades to the property, but there’s no 100 percent guarantee that the home’s value will increase substantially.

What about selling the home? According to Rammbl, this is a mistake. Selling the property when your mortgage is upside-down is a sure way to lose money.

An Upside-Down Mortgage Isn’t a Life Sentence

If you have an upside-down mortgage, you’re probably worried. This is understandable, but unless you’re planning to sell the home, you’ve nothing to worry about. Just keep servicing your mortgage and eventually, your home’s value will rise.

Keep tabs on our blog for more real estate tips and insights.

Author: WebEditor