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An underwater mortgage, also called an upside-down mortgage, occurs when the loan’s principal balance is higher than the home’s fair market value, resulting in negative equity. In other words, a mortgage becomes underwater when you owe more than your home is worth, and your loan-to-value ratio exceeds 100%.

Around 270,000 Americans who borrowed a mortgage to buy a home in 2022 are now at least marginally underwater, according to a Dec. 5 report from Black Knight, a mortgage analytics company. While this may sound alarming, negative equity rates are still far below historical averages.

It can be distressing to have an underwater mortgage, but it’s not necessarily a cause for panic. A mortgage can become upside-down when your property’s value drops for reasons beyond your control, such as during a housing market downturn. But if your mortgage is underwater because you simply haven’t been making payments – and the unpaid interest has become an unmanageable burden – then you may need to take more serious action.

What you should do with an underwater mortgage depends on the severity of the upside-down loan amount and your own financial circumstances. Here are five strategies for getting out of an underwater mortgage.


Stay Put and Keep Paying Down Your Principal

Being underwater on a mortgage isn’t uncommon, particularly for new homeowners who haven’t had much time to pay down their mortgage principal. Negative equity is even more prevalent among buyers with a small down payment, such as those who borrowed an FHA or VA loan, according to Black Knight.

Let’s say you bought a home for $350,000 with a 5% down payment, meaning your initial home loan amount was $332,500. After seven months of making on-time payments at a 6% mortgage rate, your loan balance would be paid down to around $330,000. At the same time, however, home values in your neighborhood dropped meaningfully, and your home is now worth $320,0000. This means you’re about $10,000 underwater on your mortgage with a loan-to-value ratio of 106%.

In this circumstance, it may be advisable to simply keep making mortgage payments and take no further action. This way, you can keep your home without any negative impact to your finances or credit score. After a repayment period of months or years, you’ll have paid down your mortgage principal – and home values are also likely to rebound over the long term. This option can be best if you don’t have an immediate need to sell your home, such as job relocation or divorce.

You may also decide to make additional payments toward the principal balance in order to get back on track faster, if you have the extra cash flow to do so. But since you have negative equity in your home, it will be difficult to sell or refinance your home – unless you have the cash upfront to cover the underwater loan amount. Plus, selling or refinancing your home after such a short time would undoubtedly be more expensive than simply staying put.