The Definition of Upside-Down Mortgage

Identification

Another name for an upside-down mortgage is negative equity. Negative equity occurs when debts that are secured by the home exceed the home's value. A couple of things can cause negative equity or an upside-down mortgage, such as a decline in local real estate listings. Also, if the home's value stays the same but the borrower pays less than the interest, the loan balance can increase to more than the value of the home.

If home buyers don't make a down payment on their home, they are in negative equity even before they move in. That's because their loan is already equal to 100 percent of the purchase price.

Borrowers usually expect the value of their home to stay the same or increase over the years. However, when local real estate values decline, borrowers are disappointed. Payments might increase to much more than they can afford each month. Borrowers don't have much choice but to just keep on making payments month in and month out, or to get rid of the home. But these homes are a very tough sell, and borrowers in upside-down mortgages often end up in foreclosure.

However, according to CBS News, interest rates do sometimes fall and if you have an adjustable rate mortgage, your monthly payment may go down over time. You also may be able to negotiate with your bank to get them to drop your payments so you can afford the home.

If your payments don't drop, you may want to consider a short sale. In a short sale, a mortgage company agrees to take less than the mortgage's full balance to settle the debt. Then, you sell the home and give the mortgage company whatever you make on the sale. The mortgage company forgives the rest of the loan according to Bills.com. To do a short sale, you have to first get approval from the lender to see if the mortgage company offers this option. If your lender will not let you do a short sale, another option is a "deed in lieu of foreclosure." In this case, you would surrender the home to the lender before any foreclosure takes place.

In some cases it is possible to refinance. For instance, if you have a Federal Housing Administration loan on your home, you can get a refinance to decrease the payments on an upside-down mortgage. This option is available to borrowers who have kept up with their mortgage payments, according to Government Refinance Assistance. Before taking out your mortgage, you might want to consider what options would be available if you ended up with negative equity.