Navigating Negative Equity: What to Do When Your Mortgage Is Underwater


Buying a home is often considered the pinnacle of the American dream. It symbolizes stability, security, and financial success. However, sometimes life doesn’t go as planned and unexpected circumstances can lead to a situation called negative equity, where your mortgage is underwater. Negative equity occurs when you owe more on your mortgage than your home is worth. This can be a stressful and overwhelming situation for any homeowner, but it’s essential to know that you’re not alone. In this blog, we’ll discuss what negative equity is, its causes, and most importantly, what you can do to navigate this challenging situation.

What is Negative Equity?

As mentioned earlier, negative equity occurs when you owe more on your mortgage than your home’s current market value. For example, if your home is currently worth $300,000, but you owe $350,000 on your mortgage, you have $50,000 in negative equity. This is also referred to as being ‘underwater’ or ‘upside down’ on your mortgage. Negative equity can happen for various reasons, such as a decline in the housing market, high-interest rates, or borrowing more than the property’s value. Whatever the reason may be, being in this situation can be daunting for any homeowner.

What Causes Negative Equity?

Negative equity can be the result of several factors, but the most common cause is a decline in the housing market. In a healthy housing market, home values appreciate over time. However, sometimes due to economic downturns or other factors, home values can decrease, resulting in negative equity. Another cause of negative equity is having a low down payment when purchasing a home. If you put down less than 20% of the home’s value, you have a higher chance of ending up in negative equity, especially if the housing market declines. Additionally, taking out a second mortgage or home equity loan can also contribute to negative equity as it increases the amount you owe on your home.

What Can You Do About Negative Equity?

1. Wait it Out: One option for homeowners in negative equity is to wait for the housing market to improve. Real estate markets are constantly fluctuating, and there’s a possibility that your home’s value may appreciate in the future, eventually negating the negative equity. However, this option comes with its own set of risks. You have no control over the housing market, and it could take years for your home’s value to increase significantly. In the meantime, you will continue to pay the mortgage on a home that’s not worth its purchase price.

2. Increase Your Mortgage Payments: Another option is to increase your mortgage payments by paying more than the minimum amount due every month. This will help you build equity in your home faster, and if the housing market improves, you will be in a better position to sell or refinance your home.

3. Refinance Your Mortgage: Refinancing your mortgage is another way to deal with negative equity. By refinancing, you can reduce your monthly mortgage payments, which will make it easier to pay off your loan and build equity in your home. However, refinancing is not always a feasible option, especially if you’re already struggling to make your mortgage payments.

4. Short Sale: If you’re unable to keep up with mortgage payments and don’t see the housing market improving in the near future, you may have to consider a short sale. A short sale is when you sell your home for less than the amount owed on the mortgage. The bank agrees to take the proceeds from the sale as repayment for the loan, and the remaining balance is forgiven. A short sale can negatively impact your credit score, but it’s less damaging than a foreclosure.

5. Foreclosure: Foreclosure should be a last resort for homeowners facing negative equity. Foreclosure is the legal process where the lender takes possession of your home to recover the amount owed on the mortgage. Foreclosure will have a significant impact on your credit score, making it difficult for you to secure credit in the future.


Navigating negative equity can be a challenging and stressful experience, but it’s crucial to remember that you’re not alone. The first step to dealing with negative equity is understanding what it is and its causes. From there, you can explore your options, such as refinancing, increasing mortgage payments, or considering a short sale. It’s also essential to communicate with your lender and seek professional advice from a financial advisor or a real estate agent. Remember that this situation is temporary, and with patience and perseverance, you can overcome it.

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