{"id":21023,"date":"2023-11-14T08:00:00","date_gmt":"2023-11-14T13:00:00","guid":{"rendered":"https:\/\/www.zolo.ca\/blog\/?p=21023"},"modified":"2023-11-13T16:28:22","modified_gmt":"2023-11-13T21:28:22","slug":"underwater-mortgage","status":"publish","type":"post","link":"https:\/\/www.zolo.ca\/blog\/underwater-mortgage","title":{"rendered":"Do You Have an Underwater Mortgage? Here Are Your Options"},"content":{"rendered":"\n\n\n<p>When you owe more than your home is worth, you may be dealing with an underwater mortgage. Having an underwater mortgage is not an ideal scenario and can result in excess risk to your finances. It can affect your ability to refinance your mortgage or sell your home \u2013 in short, it\u2019s something you want to avoid.<\/p>\n\n\n\n<p>But how do you know if you have an underwater mortgage, and how can you take steps to manage one, if&nbsp; you\u2019ve found yourself in that position? Here\u2019s what you need to know about underwater mortgages.<\/p>\n\n\n\n<section class=\"bg-white border-t border-b border-blacklight my-12 md:my-16 sticky md:relative top-0 md:top-auto z-10 md:z-auto alignwide  wp-block-zolo-block-toc \" aria-hidden=\"true\"><div class=\"wrapper relative max-w-2xl mx-auto md:py-8 flex flex-col flex-shrink-0 max-h-screen md:max-h-none\"><input type=\"checkbox\" id=\"toc-toggle\" class=\"hidden\"\/><label for=\"toc-toggle\" class=\"flex justify-between cursor-pointer md:cursor-auto py-4\"><div class=\"toc-title leading-normal font-medium m-0\">In this article<\/div><svg class=\"w-6 h-6 fill-current text-blue md:hidden transition-transform duration-150 ease-in-out\" viewbox=\"0 0 24 24\"><path d=\"M22 12c0-5.5-4.5-10-10-10S2 6.5 2 12s4.5 10 10 10 10-4.5 10-10zM6.9 10.9l1.4-1.4 3.7 3.7 3.7-3.7 1.4 1.4L12 16l-5.1-5.1z\"><\/path><\/svg><\/label><nav id=\"toc-nav\" class=\"zolo-toc-nav max-h-0 md:max-h-full overflow-y-auto scrollbar-hidden overscroll-none\"><ul class=\"zolo-toc-list my-4\"><li><a class=\"entry-title no-underline hover:underline\" href=\"#what-is-an-underwater-mortgage?\">What is an Underwater Mortgage?<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#what-causes-an-underwater-mortgage?\">What Causes an Underwater Mortgage?<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#your-mortgage-is-underwater---what-now?\">Your Mortgage is Underwater &#8211; What Now?<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#risks-of-an-underwater-mortgage\">Risks of an Underwater Mortgage<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#how-to-get-out-of-an-underwater-mortgage\">How to Get Out of an Underwater Mortgage<\/a><\/li><li><a class=\"entry-title no-underline hover:underline\" href=\"#final-thoughts\">Final Thoughts<\/a><\/li><\/ul><\/nav><\/div><\/section>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what-is-an-underwater-mortgage?\">What is an Underwater Mortgage?<\/h2>\n\n\n\n<p>An underwater mortgage happens when you owe more to your lender than your home is worth. For example, if your mortgage balance is $500,000, but your home is worth $450,000. You are \u201cunderwater\u201d on your mortgage because you would still owe your lender money even if you sold your home, and you would need to pay the lender the remaining difference.&nbsp;<\/p>\n\n\n\n<p>An underwater mortgage can happen for several reasons, both within your control, like missing mortgage payments, and due to factors you can\u2019t control, like your local real estate market.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what-causes-an-underwater-mortgage?\">What Causes an Underwater Mortgage?<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"683\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2017\/09\/bigstock-Colleagues-Discussing-Document-133961063-1024x683.jpg\" alt=\"Colleagues Discussing Documents Sitting In The Office. African E\" class=\"wp-image-3314\"\/><\/figure>\n\n\n\n<p>An underwater mortgage can happen for many reasons, all of them either falling into the category of not paying down your loan principal, or the value of your home depreciating. Here are some common reasons for an underwater mortgage.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Decreased Home Value<\/h3>\n\n\n\n<p>Home prices aren\u2019t set in stone and go up and down depending on local market conditions. While homes in Canada have traditionally risen in value over time, there are several periods in history when home prices have dropped, one as recently as 2022.&nbsp;<\/p>\n\n\n\n<section class=\"wp-block-zolo-related flex items-center py-6 leading-tight border-t border-b border-blacklight undefined\"><p class=\"font-serif pr-6 md:pr-12 mr-6 md:flex-shrink-0 border-r border-blacklight\">Related content<\/p><p class=\"related-link w-full my-0\"><a href=\"https:\/\/www.zolo.ca\/blog\/housing-supply-and-demand\">Supply and Demand of Housing in Canada<\/a><\/p><\/section>\n\n\n\n<p>Home values dropping even a few percentage points can leave you with an underwater mortgage. For example, if you purchase a home for $500,000 with 5% down, you\u2019re mortgage will be $494,000 after adding $19,000 in CMHC mortgage default insurance premiums. That means if your home\u2019s value drops just $6,000 ($500,000 &#8211; $494,000), your mortgage will be larger than the home\u2019s value, leading to an underwater mortgage.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Rising Interest Rates<\/h3>\n\n\n\n<p>Interest rates have risen precipitously over the past few years, which increases the cost of servicing your mortgage. In some cases, variable rate mortgage holders have even hit their <a href=\"https:\/\/www.zolo.ca\/blog\/mortgage-trigger-rate\">trigger rate<\/a>, which is the interest rate at which you are no longer paying down the interest on your mortgage. If that happens, you aren\u2019t increasing your equity in your home, and you become vulnerable to decreasing home prices.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Missing Mortgage Payments<\/h3>\n\n\n\n<p>You can also send your mortgage underwater if you miss your mortgage payments. Many lenders offer a \u201cskip a payment\u201d option with their mortgages, which lets homeowners skip payments once annually. While this option can be helpful if you experience job loss or another unexpected life event, the has some downsides and can land you in an underwater mortgage.<\/p>\n\n\n\n<section class=\"wp-block-zolo-related flex items-center py-6 leading-tight border-t border-b border-blacklight undefined\"><p class=\"font-serif pr-6 md:pr-12 mr-6 md:flex-shrink-0 border-r border-blacklight\">Related content<\/p><p class=\"related-link w-full my-0\"><a href=\"https:\/\/www.zolo.ca\/blog\/refinance-mortgage\">The Complete Guide to Refinancing Your Mortgage<\/a><\/p><\/section>\n\n\n\n<p>When you take out a new mortgage, most of your monthly payments will go toward the interest portion of your loan. As you make your mortgage payments, more and more of your costs go toward reducing the overall balance. When you skip a payment, the interest portion of your payment isn\u2019t paid off and will accumulate. This means you won\u2019t make as much progress on paying down your mortgage as you would if you never missed a payment. Combine that lack of progress with dipping home prices, and you may find yourself with an underwater mortgage.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"your-mortgage-is-underwater---what-now?\">Your Mortgage is Underwater &#8211; What Now?<\/h2>\n\n\n\n<p>If you suspect your mortgage is underwater, the first step you\u2019ll need to take is to confirm your suspicions. You can do that by taking three steps:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>Verify your current loan balance:<\/strong> Find out how much is owed on your mortgage, either through your lender\u2019s online banking portal or by calling them directly.<\/li><li><strong>Estimate your home\u2019s worth:<\/strong> Determine <a href=\"https:\/\/www.zolo.ca\/how-much-is-my-home-worth\">how much your home is worth<\/a> by using a home valuation estimator from a real estate website or by hiring an appraiser to evaluate your home.<\/li><li><strong>Subtract your loan balance from your home\u2019s value:<\/strong> If your mortgage is a larger number than the value of your home, your mortgage is underwater. For example, if your home is valued at $500,000, but you owe $550,000 remaining on your mortgage, you are underwater by $50,000.<\/li><\/ol>\n\n\n\n<p>If you\u2019ve found that your home is underwater, don\u2019t panic. If you can keep up with your mortgage payments, you may be able to wait until home prices rebound and your home\u2019s value rises enough that you are no longer underwater. You generally won\u2019t encounter problems with an underwater mortgage if you don\u2019t attempt to sell your home or refinance your mortgage.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"risks-of-an-underwater-mortgage\">Risks of an Underwater Mortgage<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"536\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2020\/09\/is-money-the-most-important-part-of-homeownership-1024x536.jpg\" alt=\"what does underwater mortgage mean\" class=\"wp-image-15753\"\/><\/figure>\n\n\n\n<p>While having an underwater mortgage isn\u2019t a reason to panic or take action immediately, it does carry some risks.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Defaulting on Your Mortgage<\/h3>\n\n\n\n<p>If you are having problems keeping up with your mortgage payments, you risk putting your mortgage into default. If that happens, your lender could force the sale of your home, and you\u2019ll still owe your lender the difference between the sale price and the remaining loan balance.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Harming Your Credit Score<\/h3>\n\n\n\n<p>If you\u2019re underwater on your mortgage because you\u2019ve been missing payments, your credit score may be affected. If your mortgage goes into default, your credit score will be severely impacted.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Not Able to Refinance<\/h3>\n\n\n\n<p>If you need to change the terms of your mortgage, for example, accessing more equity or lengthening or shortening the length of your loan, you may not be able to if you owe more on the home than it is worth. New lenders may turn down your application, and your existing lender may even require a lump sum payment to bring your mortgage back into good standing before they refinance your home.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how-to-get-out-of-an-underwater-mortgage\">How to Get Out of an Underwater Mortgage<\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"683\" loading=\"lazy\" src=\"https:\/\/www.zolo.ca\/blog\/wp-content\/uploads\/2017\/09\/bigstock-Couple-Facing-Debt-Problems-N-164619422-1024x683.jpg\" alt=\"Renew mortgage. Couple Facing Debt Problems, Not Able To Pay Out Their Mortgage.\" class=\"wp-image-3273\"\/><\/figure>\n\n\n\n<p>Being underwater on your mortgage isn\u2019t a reason to panic, but you should take prompt action to bring your mortgage back into good standing. Here are some ways to get your underwater mortgage above water.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Rent the Home Out<\/h3>\n\n\n\n<p>If you can\u2019t sell your home due to an underwater mortgage, consider renting it out until the market improves or you pay down enough of the loan that you\u2019re no longer underwater. If you want to stay in the home, you could consider renting out a room in the home, and using the extra income to pay down the mortgage quicker.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Wait It Out<\/h3>\n\n\n\n<p>If your mortgage is underwater because home prices in your area have dropped, waiting for them to rebound could solve your problem. Home prices have a long history of growth, but it may take some time for prices to fully recover.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Raise the Value of Your Home<\/h3>\n\n\n\n<p>Another way to get out of negative equity is to raise the value of your home. The more your home is worth\u2014even in a real estate market decline\u2014the smaller the chance of an underwater mortgage.<\/p>\n\n\n\n<p>A few ways to increase the value of your home are to:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Adding a patio, deck or outdoor living space<\/li><li>Improving the curb appeal<\/li><li>Adding more living space (such as finishing the basement or converting the attic)<\/li><li>Upgrading your kitchen or bathroom<\/li><\/ul>\n\n\n\n<p>Keep in mind that whatever you do to raise the value of your home, be sure that you can afford to take on this cost and that the upgrade plan doesn\u2019t push you into more debt.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Make Extra Payments<\/h3>\n\n\n\n<p>If you can, make extra payments to your mortgage lender. Most lenders allow you to make an extra payment, double-up payments, or make a lump-sum payment towards the principal loan balance. These extra payments will reduce your loan balance and could get you out of underwater territory.<\/p>\n\n\n\n<p>If making an extra payment is too much of a stretch, consider changing your payment frequency. Switching from monthly to biweekly mortgage payments means making an extra mortgage payment each year\u2014so 13 months of payments, rather than 12 months.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"final-thoughts\">Final Thoughts<\/h2>\n\n\n\n<p>In a real estate market where home prices are declining\u2014or there is a potential for price drops\u2014homeowners need to pay attention to their own balance sheet and learn when and if a negative equity situation could happen.&nbsp;<\/p>\n\n\n\n<p>Remember, while a home is an asset \u2013 it isn\u2019t an investment. You don\u2019t have to earn or make money on your home year after year. That said, negative equity can make it challenging to sell your home, so you\u2019ll want to pay attention to the factors that are beyond your control, such as falling home values, or rising mortgage rates. That said, there are some factors you can control, such as avoiding high-interest loans, cutting spending, increasing your down payment and tackling mortgage debt, early. Do this, and you\u2019ll weather any market storm the real estate cycles throw at you.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Here&#8217;s what to do if you owe more on your home than it&#8217;s worth<\/p>\n","protected":false},"author":91,"featured_media":23207,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[46],"tags":[],"guide":[],"class_list":["post-21023","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance"],"acf":[],"zolo_excerpt":"","_links":{"self":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/21023","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/users\/91"}],"replies":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/comments?post=21023"}],"version-history":[{"count":10,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/21023\/revisions"}],"predecessor-version":[{"id":23209,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/posts\/21023\/revisions\/23209"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media\/23207"}],"wp:attachment":[{"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/media?parent=21023"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/categories?post=21023"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/tags?post=21023"},{"taxonomy":"guide","embeddable":true,"href":"https:\/\/www.zolo.ca\/blog\/wp-json\/wp\/v2\/guide?post=21023"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}