Background

The term “underwater mortgage” (also called “negative equity”) became widely known after the 2007–2009 housing downturn, when many borrowers owed more than their homes were worth. Today, local market swings, rising interest rates, and uneven home-price recovery can still create underwater situations for homeowners.

How an underwater mortgage affects you

Lenders still expect full repayment of the loan even when market value falls. Being underwater doesn’t remove your obligation to pay, but it changes the options that make sense. In my 15 years helping clients, the most productive first step is contacting your servicer early—many workouts require documentation and time to process (Consumer Financial Protection Bureau: https://www.consumerfinance.gov/).

Key options to consider

  • Stay and keep paying

  • Best if you can afford payments and expect local values or equity to recover. Staying avoids the credit damage associated with a sale under distress.

  • Consider budgeting, emergency savings, and whether a refinance or rate reduction is possible—refinancing while underwater is limited and typically requires specific programs or investor flexibility.

  • Modify the loan or request forbearance

  • Loan modification changes loan terms (rate, term, or principal treatment) to lower monthly payments. For short-term hardship, forbearance pauses or reduces payments for a set period. Talk directly with your servicer and get offers in writing. See practical guidance on loan workouts and negotiation strategies ([loan modification resources](