By all appearances, it looked like the perfect home: modern kitchen, great school district and that quiet cul-de-sac charm. But a few years and several rate hikes later, it’s not looking so picture-perfect. For many Americans, especially those who bought near the market’s peak, the dream of homeownership is starting to feel more like a trap.
If you owe more on your mortgage than your home is worth, you’re not alone. Negative equity—also known as being “underwater” or “upside-down” on your mortgage—is becoming more common, particularly in parts of the country hit hard by cooling markets and economic shifts. And while it’s not an ideal situation, it doesn’t have to be a dead end. Selling while underwater is possible—and for some, it might be the smartest way forward.
What Does It Mean to Be Underwater?
You’re considered underwater on your mortgage when the amount you owe surpasses your home’s current market value.
Say you bought a home for $400,000 two years ago, putting down just 5%. Your mortgage balance started around $380,000. Fast-forward to today. Your local market has cooled, maybe job growth has slowed, and your home appraises for just $350,000. Even if you’ve chipped away at the loan, you might still owe $370,000. That’s a $20,000 shortfall, money you’d have to cough up just to get out.
How Does This Happen?
Negative equity doesn’t just happen overnight. It creeps up on you, often as a result of:
- Buying at or near a market peak: When you buy high and the market drops, you’re left holding a loan bigger than your home’s value.
- Low down payments: A small down payment means you start with very little equity. Even minor price dips can push you underwater.
- Rising interest rates: If you have an adjustable-rate mortgage or balloon payment, rising rates can increase your payments and dampen demand, hurting resale value.
- Local issues: Deferred maintenance or an economic downturn in your area (think layoffs or population loss) can drag down home values.
In other words, even responsible homeowners can find themselves upside-down through no fault of their own.
Where Is Negative Equity Rising?
Data shows the problem isn’t evenly spread. States like Louisiana (11.3%), Wyoming (8.8%), Kentucky (8.3%), Mississippi (7.1%) and Oklahoma (6.1%) are seeing some of the highest rates of seriously underwater mortgages.
What’s behind it? Housing experts point to shifting local economies, especially in areas historically dependent on fossil fuel industries. As jobs leave, so does demand for housing. Add in the inflated home prices of the 2021–22 buying frenzy, and you’ve got a recipe for negative equity.
Should You Sell While Underwater?
Nobody wants to sell at a loss. But sometimes, doing so makes more financial sense than holding on and hoping things improve. Here are a few scenarios where selling could be the right move:
- Your mortgage is no longer affordable: If your monthly payments are eating into your savings—or worse, pushing you toward default—selling now could help you stop the bleeding.
- Renting it out isn’t realistic: Being a landlord isn’t for everyone. If rental income won’t cover the mortgage or you just can’t handle the hassle, selling could be a cleaner solution.
- Life is forcing a move: Job relocation, divorce, illness, sometimes life doesn’t wait for the market to recover. Selling, even at a loss, might be the only way forward.
- Your lender approves a short sale: This is when the bank agrees to let you sell the home for less than you owe and forgives the remaining balance. You’ll need to prove financial hardship and get approval, but it could help you avoid foreclosure and a bigger financial hit.
- Waiting could dig a deeper hole: If the market keeps sliding or your financial situation worsens, hanging on might cost you more in the long run.
Weighing the Pros and Cons
Selling a home with negative equity has its upsides and its risks. Here’s what to keep in mind:
Pros
- Relief from high mortgage payments: Selling can free up your budget and reduce financial stress.
- Ability to relocate or downsize: Opens the door to a more affordable home or lets you move for work or personal reasons.
- Prevents foreclosure if managed wisely: With the right approach—like a short sale—you can avoid the long-term damage of foreclosure.
Cons
- You might need to bring cash to closing: If your lender doesn’t approve a short sale, you’ll need to pay the difference between sale price and mortgage balance.
- Your credit could take a hit: Short sales and missed payments show up on your credit report.
- You could miss out on future gains: If the market rebounds, you won’t benefit. But that’s a gamble; one cannot predict the future with certainty.
What Should You Do?
Start by facing the numbers. Get a clear picture of your home’s current market value and compare it to what you owe. Then ask yourself:
- Can I realistically afford to stay here long term?
- Am I prepared to wait and hope the market recovers?
- Do I have the emotional and financial capacity to rent it out?
- What would selling mean for my overall financial health?
You Don’t Have to Navigate This Alone
Selling while underwater can be complicated, but you don’t have to figure it all out on your own. Here’s who to call:
- A real estate agent who knows short sales or distressed properties: They’ll know how to price and market your home and negotiate with your lender.
- A real estate attorney: Especially important if foreclosure is on the table or you’re in a judicial foreclosure state.
- Your lender’s loss mitigation department: They handle short sale requests, loan modifications, and forbearance options.
- A HUD-approved housing counselor: They offer free, objective advice and can help you weigh your options.
Final Word
Being underwater on your mortgage is tough. It can feel like you’re stuck, watching money go out the door every month with no end in sight. But remember, your house is not your life. It’s a financial tool. Sometimes, the smartest move is to cut your losses, regroup, and reset.
Selling with negative equity isn’t ideal, but it is doable and it might just be your first step toward financial peace of mind.
