What Is an Underwater Mortgage?

Reviewed by: Brandon Brown

An underwater mortgage doesn’t refer to a sunken houseboat or a certain square sponge’s pineapple under the sea. Homeownership comes with a lot of costs and a lot of jargon, and wading through either without enough information is risky. So, what is an underwater mortgage? When your mortgage is “underwater,” it means you owe more than your property is worth. Being underwater on your mortgage can be temporary: You may overcome this with continued mortgage payments. However, it can also be a crisis if you need to relocate or can’t make your payments. If you’re holding an underwater mortgage and ready for the tides to change, you have options—including connecting with an iBuyer like FlipSplit that can help you move on with a fast, as-is sale.

How Does an Underwater Mortgage Happen?

Buying a house ticks multiple boxes. It’s a home to live in now, a location to store your belongings, and—ideally—an investment that’ll pay off in the future. In most circumstances, real estate is a reasonably safe way to earn a future profit or at least come out even in a future sale. After all:

Under normal conditions, US residential values increase by about 4% per year.¹
Between 2019 and 2024, home values increased by approximately 9% per year.
You can recoup as much as 194% in property value from the right upgrades.²

But, as with any investment, there’s always risk. Homeowners can lose their equity and end up with an underwater mortgage when they:

Buy during a period of inflated property values, which later decline
Opt for a small (or zero, with some programs) downpayment
Take out a high-interest or adjustable-rate mortgage (or another risky loan type)
Allow their property to deteriorate

Plus, there are many factors homeowners can’t control. The housing market can drop, and home values can plummet due to local, state, and national economic factors.

How Do You Know If Your Mortgage Is Underwater?

Homeowners may not even be aware that their mortgage is underwater if they’re in a stable financial position and simply keep chipping away at mortgage debt through monthly payments. It can come as an unwelcome surprise during an appraisal when they try to refinance, sell, or borrow against their home. Is your mortgage still sailing along safely? It’s pretty simple to figure out with three simple steps.

#1 Estimate Your Home’s Market Value

You can use a comparative market analysis from a real estate agent or a paid professional appraisal, but there’s an easier way. Search for “home value estimator” online, and average the results of two or three different sites.

#2 Compare Against Your Loan Balance

Sign in to your lender’s website or look at your most recent monthly mortgage statement. Find the current mortgage payoff amount to see what you still owe.

#3 Evaluate the Equity Gap

Compare the two numbers. If the home value from step #1 is less than the loan payoff amount in step #2, you’re underwater.

What Are the Risks of Being Underwater on a Mortgage?

When your mortgage is underwater, your home’s current market value is lower than the amount you still owe to your mortgage lender. An underwater mortgage makes it difficult to:

Sell your home in a traditional sale and/or without fronting cash for closing
Refinance your home
Borrow against your equity with a home loan or line of credit (HELOC)

Plus, your risk of foreclosure is sky-high. Homeowners who encounter financial hardship when their mortgage is underwater are more likely to end up with a loan delinquency and default, leading to repossession of their property.

What Are Your Options If You Have an Underwater Mortgage?

The first step is to stay calm. You have several options available with an underwater mortgage. You can:

Stay and pay down the loan – Simply make regular payments and wait for the market to recover as your payments gradually chip away at the debt.
Request a loan modification – If making your payments is a challenge, work with your lender to adjust your mortgage term or interest rate for more manageable payments.
Explore a short sale – If foreclosure is looking likely, you can consider selling for less than you owe (a “short sale”) with your lender’s approval.
Sell to a direct home buyer – Companies like FlipSplit can offer cash for your home as is—even if you’re underwater—helping you avoid complex negotiations.

Know Your Options, Regain Control

An underwater mortgage doesn’t mean you’re either stuck with your home or headed for foreclosure. You have options to consider based on your goals and timelines—from traditional paths to flexible, direct sale solutions like FlipSplit. FlipSplit works with homeowners in Southern California and beyond. We help owners sell fast without repairs, appraisals, or time spent waiting for equity to build back up; in the meantime, FlipSplit sellers avoid the credit damage, legal headaches, and delays tied to short sales and foreclosures. Visit FlipSplit to learn more and get a fair, transparent offer.

Reviewed by: Brandon Brown

As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.