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Underwater Mortgage

Home Ownership by Country


Underwater mortgage is a mortgage loan whose balance is higher than the fair market value of the home. In other words, a mortgage is said to be underwater when the property has a negative equity.

The situation usually occurs during the house market collapse such as the one that occurred during the late 2000s. When the property value decreases sharply in the market, individuals will find the home values decrease considerably. In such a case, they won't be able to sell the mortgaged house without first making up the shortfall with their own pockets.

For instance, let's suppose you have $300,000 mortgage but the value of your mortgaged house in the market is $250,000. In this case your mortgage is $50,000 more than your property value, and your mortgage is said to be underwater mortgage.

You can use online underwater mortgage calculator to determine whether your home has a negative equity. You need to enter the initial loan amount, loan term, interest rate, first payment date, other monthly prepayment, and current home value to determine the extent to which your mortgage loan amount exceeds the home value.

What are the Solutions to Underwater Mortgages?

A problem with underwater mortgage is that you won't be able to sell the mortgaged house without making up the shortfall with your own pockets. Moreover, if you face financial difficulties and can't afford to make mortgage payments, the home will have to be foreclosed.

The only way to avoid foreclosure with underwater mortgage is to re-negotiate the terms and agreement with the lender company.

The ideal solution to underwater mortgage is to avoid selling the house. However if you face financial difficulty and can't keep up with the mortgage payment, then you should consider applying for Home Affordable Refinance Program (HARP) in the US.

HARP is a government initiative to help individuals with underwater mortgage to refinance the loan at viable rates. The program allows homeowners with negative home equity to refinance their mortgages with lenient terms and conditions.

In order to qualify for the program, the underwater mortgage balance must be not less than 80% of the home value. Moreover, the homeowner must have zero or less delinquencies to become eligible for the HARP program.

HARP is the best program to lower the burden of loan payments in case of underwater mortgage. However, there is one big drawback that the application process takes a long time. You have to wait a certain period of time before your application is granted.

For quick refinancing of your underwriter mortgage you must contact finance companies that deal with such mortgage. The refinancing company will give you a new loan in place of the old one. The refinanced mortgage loan will have a lower monthly payment, a reduced rate, or a fixed rate instead of the adjustable rate. This will make it easier for you to make monthly payments.


Further Reading


Locked in the house: Do underwater mortgages reduce labor market mobility?Locked in the house: Do underwater mortgages reduce labor market mobility?
papers.ssrn.com [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

House arrest: the effects of underwater and low-equity mortgages on small business failure and mobilityHouse arrest: the effects of underwater and low-equity mortgages on small business failure and mobility
www.tandfonline.com [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

Using eminent domain to write-down underwater mortgages: an economic analysisUsing eminent domain to write-down underwater mortgages: an economic analysis
aresjournals.org [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

Paying Paul and robbing no one: an eminent domain solution for underwater mortgage debtPaying Paul and robbing no one: an eminent domain solution for underwater mortgage debt
papers.ssrn.com [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

Fear, shame and guilt: economic and behavioral motivations for strategic defaultFear, shame and guilt: economic and behavioral motivations for strategic default
onlinelibrary.wiley.com [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

The depth of negative equity and mortgage default decisionsThe depth of negative equity and mortgage default decisions
papers.ssrn.com [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic …It Takes a Village: Municipal Condemnation Proceedings and Public/Private Partnerships for Mortgage Loan Modification, Value Preservation, and Local Economic …
heinonline.org [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

Underwater mortgages: Why homeowners may continue to pay the debtUnderwater mortgages: Why homeowners may continue to pay the debt
search.proquest.com [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …

A neurological explanation of strategic mortgage defaultA neurological explanation of strategic mortgage default
link.springer.com [PDF]
… These results suggest that an underwater mortgage lock-in effect on homeowner mobility is real and large … This suggests that the lock-in effect due to underwater Page 26. 26 mortgages has not impeded the efficiency of the job market matching process, and has …



Q&A About Underwater Mortgage


Can I get my current loan modified under HARP instead of applying for new one under this program ?

No, only those who don't qualify for existing modifications programs can apply for HARP program .

Who was involved in this crisis?

The United States was involved in this crisis.

Why would anyone want an HARP program if they already have a loan modification from lender companies?

A HARP program may be better for some homeowners because it allows them to refinance into loans backed by Fannie Mae and Freddie Mac which offer lower interest rates and fees compared with private lenders like banks or credit unions.

How does an underwater mortgage work?

The borrower makes payments to reduce the principal amount owed, while paying interest on only that portion of debt not covered by the current value of the property.

What does it mean when a mortgage is said to be underwater?

When a property has negative equity, it means that the homeowner owes more on their loan than what their house is worth.

What caused this crisis?

A large decline in US home prices after a housing bubble collapse led to delinquencies, foreclosures, and devaluation of housing-related securities. Declines in residential investment preceded the Great Recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.

What is underwater mortgage?

An underwater mortgage is a home loan where the outstanding balance of the loan exceeds the value of the property.

When did this crisis occur?

This crisis occurred between 27 and 21.

How do you avoid foreclosure with an underwater mortgage?

You should re-negotiate terms and conditions with lender companies to avoid foreclosure.

How can you determine whether your home has negative equity?

You can use online tools such as an underwater calculator to determine whether your home has negative equity.

What causes an underwater mortgage?

When house prices decrease sharply in the market, homeowners will find themselves with negative equity.

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