So, what does it mean to have an “underwater” home? Simply, it means that the homeowner owes more on the house than what it’s worth. For example, if you owe $500,000 on your home, but your home is only worth $450,000 – This means that your home is underwater. This is also commonly referred to being “upside-down” or having “negative equity.” So why use the term underwater? It is a metaphor that is believed to have likely grown out of the term “drowning in debt.”
How does this impact the owner?
Being underwater on your home could potentially prevent an individual from refinancing. It could also prevent the homeowner from selling the home unless they have the cash out of pocket to cover the loss. This is also concerning because if the homeowner wants to sell the home because he/she can’t afford the payments anymore, the home could fall into foreclosure unless the borrower is able to renegotiate the loan.
How do people end up with an underwater home?
After the housing marketing bubble burst in the 2000’s, underwater mortgages became unfortunately common. When paired with a bad economic state, they resulted in a large number of foreclosures. In many states, mortgage lenders can’t pursue borrowers for payment after their homes are foreclosed. This led to some borrowers, who could still afford their mortgage payment obligations and other bills, to strategically default if they felt they were cutting losses from a “bad investment.”
Many people also buy homes at times when supply and demand is not in their favor. They purchase homes that cost much more than they would in a typical housing market. The prices either do not accurately reflect the value, or they lose value as volatility occurs in the market.
If you’re still unsure on what your home may be worth you can also start by taking a look at this: