What is an Underwater Mortgage?
Underwater mortgages are mortgage arrangements that effectively leave the owner with more debt on the property than the current market value. Generally, an underwater mortgage situation does not arise when a buyer takes out a first mortgage. The condition tends to arise when a second or third mortgage is taken out, or if factors within the area cause the property to depreciate in value unexpectedly. One of the most common ways of getting into an underwater mortgage situation is when a property owner chooses to refinance an existing mortgage. Lenders may offer the option of borrowing on the existing equity in the property. In some instances, this can be a workable option, assuming there is a large amount of equity built up. However, if the amount of equity is relatively small, this solution can quickly lead to a level of debt on the property that exceeds the current market value. When this takes place, the property owner is essentially in an underwater mortgage situation. Another common
The nation’s real estate crisis is so severe that it is dragging the rest of the economy down with it. Banks, which lent out mortgage loans almost indiscriminately, are now saddled with fatal amounts of bad debt because people can’t pay these mortgage loans. Many people bought their homes at the height of the real estate boom, when home values were sky-high. Now, the values of their homes have plummeted – and the end is nowhere in sight – and yet they’ve still got enormous mortgage loans to pay off. As home values fell, their loans didn’t. When a mortgage loan is more than the value of the home, the borrower is said to be holding an underwater mortgage. For example – Let’s say you find a very nice, brand new home in the suburbs of Los Angeles. The year is 2005, and the real estate market is on fire. Your home is valued at $675,000. You get a loan for almost all of it, and you’re making large payments every month. By 2009, however, the value of your home has tanked, and it’s now worth $
