What to Do if You’re Underwater on a Home Loan

Quick Answer

While being underwater on your mortgage isn’t ideal, it’s only an urgent problem if you want to refinance, take out a second mortgage or sell your home soon. You can try to get above water by paying down your mortgage, improving your home’s value or waiting it out.

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Being underwater or "upside down" on your mortgage means you owe more on your loan than your home is currently worth. It can happen when housing markets are declining—such as they did during the 2008 mortgage crisis—or when you fall behind on house maintenance or mortgage payments.

While it can be discouraging to be underwater on your mortgage loan, it's not necessarily an issue unless you plan on refinancing your mortgage, taking out a second mortgage or selling the home in the near future.

How Do You Know if You're Underwater on a Mortgage?

Your loan is underwater when your remaining principal balance is higher than the home's current market value. If you want to find out if this is the case, you can:

  • Check your loan balance. Review your account or a recent mortgage statement to find out how much you currently owe on the home. If you have a second mortgage (a home equity loan or line of credit, for instance), add up the total balances from each loan.
  • Find your home's value. You can estimate your home's current value using online tools from websites like Zillow and Redfin. If you want a more precise valuation, you could pay for a home appraisal, which may cost about $350 for a single-family home, according to Home Advisor. But paying for an appraisal might not be worth it unless you really need to know if you're currently underwater. If you go to refinance or sell your home, the lender or buyer may want a new appraisal anyway.

You may have a sense of whether your mortgage is underwater before looking. If you've seen home prices falling in your area, that could be a clue that you are—or soon will be—underwater. Or, if you have to pause making payments or have a negatively amortizing mortgage (when interest accrues faster than you pay it off), that could mean you're headed under.

What Can You Do About Being Underwater on a Mortgage?

While you might not be able to control if your mortgage winds up underwater, here are three things you can do to try to get above the waterline.

1. Pay Down Your Mortgage

One option is to pay down your mortgage's balance. However, making extra mortgage payments isn't always a good idea. For example, if you have other high-rate debts, you may want to focus on paying those down first. Paying down your mortgage's principal also won't necessarily change your monthly payment unless you recast your mortgage, which may only be an option with conventional loans.

2. Invest in Home Improvements

You could also look for ways to increase your home's value, such as fixing damage or investing in home improvements. Consider the most cost-effective way to pay for the improvements and which may increase your home's value the most. If you have enough time and skills, DIY jobs could be a good way to increase your home's value without much upfront cost.

3. Wait it Out

Being underwater might not be a major concern when you're not in a rush to refinance or sell your home. If you're in your forever home, you might not need to worry about it at all. You could wait it out as you pay down your mortgage and hope that home values will increase in your area.

What Are the Potential Consequences of Being Underwater on a Mortgage?

Being underwater isn't ideal. It can be discouraging to have a home that decreases rather than adds to your net worth, and your options may be limited if you want to take out a loan or move.

For example, you might not be able to refinance your mortgage or take out a home equity loan because you don't have enough equity in the home. And if you want to sell your home, you may need to pay down the mortgage first or get your lender's approval for a short sale. With a short sale, you may need to show that you can't afford the mortgage payments, the lender may need to approve the buyer's offer and the short sale could hurt your credit.

Some underwater borrowers decide the best option is to walk away from the home and loan, which is called a strategic default. While you'll stop making payments, letting your home go into foreclosure will hurt your credit. Additionally, it could be difficult to qualify for a rental or buy a new home afterward, and the foreclosure can stay on your credit report for seven years from your first missed payment.

Good Credit Can Give You Options

You'll eventually get above water as you pay down your mortgage. In the meantime, having a good to excellent credit score can help you qualify for alternative financing options with the best possible rates and terms. For example, you could use a personal loan to invest in home improvements, or even to pay down your mortgage if you need to quickly sell your home.

If you're not sure where you're at, Experian gives you a free credit score that's updated each month. You'll also get free credit score and credit report monitoring, and insights into which factors are most helping or hurting your scores.