eli5 What does it mean to be “upside down” on your home loan and how does it happen?
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Owe more than it’s worth. I take out a $400k loan to buy a $500k house. The housing market collapses and now suddenly the house is worth $300k. I still owe $400k to the bank, but the house isn’t worth that much.
Imagine you buy a house for $100. You pay $20 up front and take a mortgage out for the other $80… so you still owe $80.
After a few years you’ve paid down another $5, so you still owe $75, but in that time the housing market took a hit in your area and your house is only worth $70 now (nobody would buy it for more than $70). Since you owe MORE than its actually worth… you’re considered upside down on the loan.
It means that you owe more on the mortgage you took out on the home than the home is currently worth. This happens when you buy a home and then the housing market drops making your home worth less than you paid/owe for it
You owe more than it’s worth. Imagine you borrow $1000 to buy a dinosaur. You make payments for 10 years of a 20 year loan, you still owe $500. However now they sell even cooler dinosaurs for $100. Its senseless to pay your debt and keep Billy (your dinosaur) even though you have grown to love his icy cold reptilian heart.
It means that your home’s value is less than how much you owe on it. “Upside down” is also referred to as “underwater”, “negative” or “negative equity”. If you were to sell said house, you would still owe the difference.
For example, house that you have a loan at is appraised at $200k, but your loan payoff amount is $250k. That means if you sell the house you’ll be “upside down” – meaning negative – $50k. You would still owe that remaining $50k.
To be upside down on a loan means you owe more than it’s market value, aka negative equity. It can happen because either you got a bad deal and paid too much originally, or perhaps you bought the home when the market was really high and over time the market went down but you’re already locked in at the price you paid
“Upside down” means the amount you owe on the mortgage is more than the home’s current value.
If you buy a house today for 100k dollars, you’ll be slowly paying off that loan for around 30 years. If the housing market collapsed tomorrow and your home is now only worth 15k dollars, you’re now looking at a loss of 85k dollars.
The question you (and your spouse) will immediately ask yourselves is, “Why are we paying a 100k mortgage for a 15k dollar house?”
In normal times, when you buy a car. You buy a new car and pay zero down payment. Once the car leaves the lot the value drops, sometimes 10%. You can’t sell the car for what you paid for it and you still have 60 payments to go.
Worth noting that if you ride out a dip in the market your home will almost always appreciate back up above the loan amount and get you back “above water”.
And in some cases the bank requests you pay up the difference asap. The bank uses your mortgage as a collateral for loans they take out from other banks. If all of a sudden your mortgage is less thrust-worthy they have an issue which they can make your issue. The financial system is a mess.
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