An underwater mortgage (also called a “negative equity” or “upside-down” mortgage) is a situation in which the outstanding principal on a home loan exceeds the home’s current market value. Because the home is worth less than what’s owed, the homeowner has no equity and faces greater risk when trying to refinance or sell the home.
This often happens when housing prices drop or when homeowners put down a very low down payment and prices decline. In this state, homeowners may be “trapped” – selling would require paying the lender the difference out of pocket.
