Underwater mortgage 2025 is a growing concern for many U.S. homeowners. During the COVID-19 pandemic, the housing market experienced an unprecedented boom. Record-low interest rates and lifestyle changes like the rise of remote work sparked a buying frenzy. Home values surged, bidding wars became common, and millions paid well over asking prices.
Now, in 2025, many of those buyers are facing a harsh reality: their homes are worth less than what they owe. If you’re one of them, this guide will help you understand what underwater means, why it happened, and most importantly what you can do about it.
What Does It Mean to Be Underwater on a Mortgage?
Being underwater on your mortgage means your home is worth less than what you owe on your mortgage loan. If you sold your house today, the proceeds wouldn’t fully cover your outstanding loan balance.
Example:
- You owe $400,000 on your mortgage.
- Your home’s current appraised value is $360,000.
- You’re $40,000 underwater.
This can severely limit your financial options. You may be unable to refinance, sell without a loss, or tap into home equity. And psychologically, it can make you feel trapped in a home or location that no longer suits your life.
How Did Homeowners End Up with an Underwater Mortgage in 2025?
1. Pandemic-Era Overpaying
During 2020–2022, historically low mortgage rates empowered buyers to bid aggressively. Many waived inspections and appraisal contingencies just to win bidding wars. Cities like Austin, Boise, and New Orleans saw prices shoot up and then decline.
- Austin: Median home prices fell over 15% from May 2022 peak.
- Boise: Prices dropped 23% by early 2024, now down about 8%.
- New Orleans: Down 10% since mid-2022.
2. Soaring Mortgage Rates
Since the pandemic, rates have more than doubled. The average 5-year fixed mortgage rate rose from 2.25% in 2020 to over 5.02% in 2025, reducing affordability and causing price declines in formerly hot markets.
Stay informed on current rates and refinancing opportunities with our guide on Today’s Mortgage Rates, July 30, 2025.
3. Return-to-Office Mandates
Many remote workers who bought far from city centers are rethinking their decisions. Long commutes, limited local amenities, and lifestyle mismatches are causing a reversal. What was once a dream has, for some, become a costly regret.
People are Reselling Their Homes More Quickly Than Before the Pandemic
Percentage of sellers by period of ownership
What You Can Do If You’re Underwater
1. Keep Paying Your Mortgage
If you can afford to stay in your home, simply continuing your payments is often the best solution. Over time, you’ll build equity, and market values are likely to recover.
2. Make Strategic Improvements
Boost your home’s value by upgrading key areas like kitchens or bathrooms. Be careful to invest only in renovations that have a positive ROI avoid over-improving beyond your neighborhood’s ceiling price.
3. Rent Out Your Home
Can’t sell but need to move? Consider renting your property. This can cover the mortgage while you wait for values to rebound.
4. Contact Your Lender
Ask about options like:
- Mortgage forbearance
- Loan modification
- Payment deferral
You may also qualify for local or federal homeowner assistance programs.
If you’re a single-income household, check our guide to Single Parent Financial Help in 2025 for assistance programs you may qualify for.
5. Consider a Short Sale (Last Resort)
In a short sale, your lender agrees to let you sell the home for less than you owe. This damages your credit but may be better than foreclosure. You must get lender approval first.
How to Protect Yourself Going Forward
1. Monitor Your Home’s Value
Use tools like Zillow or Redfin to estimate your home’s value. Also, speak with a local realtor for market-specific insight.
2. Create a Financial Buffer
Build an emergency fund of 3–6 months’ expenses. If you can, make extra mortgage payments to reduce your principal faster.
Use our free Saving Calculator to plan and grow your emergency fund effectively.
3. Avoid Emotional Decisions
Don’t sell just because values dropped. If you can hold on, you’ll likely see the value rebound over time. Housing markets move in cycles.
Real-Life Scenarios
Pandemic Buyer Regret in the UK
A couple in Worcestershire sold their home in 2020 for £1.5 million and bought a larger one in a nearby village. However, upkeep costs became overwhelming. Now, they’re selling again proof that pandemic-era decisions weren’t always sustainable.
Coastal Market Saturation
Cornwall and North Devon, UK, saw listings surge by over 85% due to second-home buyers realizing that rural, coastal living came with unexpected challenges like limited services, higher taxes, and long commutes.
Frequently Asked Questions (FAQs)
Is it common to be underwater on a mortgage in 2025?
No, it’s still relatively rare. As of Q1 2025, only 2.8% of U.S. homes are seriously underwater. However, some local markets are more affected than others.
Can I refinance if I’m underwater?
Usually not unless you’re eligible for a government relief program. Most lenders require positive equity to refinance.
What’s better: short sale or foreclosure?
Short sales are less damaging to your credit but still serious. Consult with your lender and a housing counselor before making any decision.
Final Thoughts
Being underwater on your mortgage is stressful but not permanent. Most housing markets recover over time, and continuing your payments builds equity. Whether you choose to stay, improve, rent, or eventually sell, the key is to make informed decisions not panic.
Take action today by:
- Reviewing your mortgage balance and home value
- Exploring your savings options
- Staying updated with mortgage rate forecasts and market shifts
With patience and strategy, you can move from underwater back to solid financial ground.
