Definition
An upside-down mortgage, also referred to as an underwater mortgage, is a situation where the outstanding balance on a mortgage loan exceeds the current market value of the property it secures. This means the homeowner owes more on the mortgage than the property’s current market worth, leading to negative equity.
Examples
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Residential Example: Suppose a homeowner purchased a house for $300,000 with a $270,000 mortgage loan. If the home’s market value drops to $250,000 due to a decline in property values, the homeowner now owes $20,000 more on the mortgage than the house is worth ($270,000 - $250,000 = $20,000). This homeowner has an upside-down mortgage.
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Commercial Example: Consider a small business owner who owns a commercial property with a $800,000 mortgage. If the commercial real estate market drops, reducing the property’s value to $700,000, the owner finds themselves $100,000 underwater ($800,000 - $700,000 = $100,000).
Frequently Asked Questions (FAQs)
What are the consequences of having an upside-down mortgage?
Homeowners with an upside-down mortgage will face challenges selling the property or refinancing the loan unless they can cover the deficit out of pocket. They may also be at risk of foreclosure if they can no longer afford mortgage payments.
Can an upside-down mortgage be refinanced?
Refinancing an upside-down mortgage can be difficult but is possible through certain programs such as the Home Affordable Refinance Program (HARP), which was created to assist homeowners with refinancing their loans despite negative equity.
What options do homeowners have if they are upside down on their mortgage?
Homeowners can explore options such as loan modification, short sales, deed-in-lieu of foreclosure, or even renting out the property until market conditions improve.
How can one avoid getting into an upside-down mortgage?
Ways to avoid an upside-down mortgage include putting a larger down payment when purchasing property, avoiding overpaying for a house, choosing a fixed-rate mortgage, and regularly checking property values.
Related Terms
- Short Sale: A sale in which the lender agrees to accept a payoff for less than the amount owed on the mortgage.
- Underwater Mortgage: Another term for an upside-down mortgage, indicating the mortgage is more than the property’s market value.
- Negative Equity: The condition when the quality of being ’negative’ in value in the property loan outweighs the property itself, requiring revelational intervention.
Online Resources
- Federal Housing Finance Agency (FHFA) - Offers resources and support for homeowners in distress.
- Home Affordable Refinance Program (HARP) - Provides refinancing assistance to those with underwater mortgages.
- U.S. Department of Housing and Urban Development (HUD) - Offers general housing-related resources and foreclosure avoidance assistance.
References
- Federal Housing Finance Agency. (2023). Refinancing options for homeowners. Retrieved from FHFA.gov
- U.S. Department of Housing and Urban Development. (2023). Mortgage Assistance and Counseling. Retrieved from HUD.gov
Suggested Books for Further Studies
- “The Automatic Millionaire Homeowner: A Powerful Plan to Finish Rich in Real Estate” by David Bach
- “Mortgage Confidential: What You Need to Know That Your Lender Won’t Tell You” by David Reed
- “Real Estate Finance and Investments” by Peter Linneman
