Question Upside Down and Underwater Homes

[BankruptinNJ]

I'm new to this forum and I am confused when I read that people's homes are "upside down" or "underwater". What does this mean?

[JackBondLove]

It means that there is more debt on the asset than the fair market sale (after commission, etc.) value. A person is considered underwater in general if his non-exempt (i.e., exempt in bankruptcy) assets exceed his debts.

[BankruptinNJ]

Thanks for responding JackBondLove. So do they mean the same thing? Are they just two different ways of describing the same thing?

It means that there is more debt on the asset than the fair market sale (after commission, etc.) value. A person is considered underwater in general if his non-exempt (i.e., exempt in bankruptcy) assets exceed his debts.

[momofthree]

Thanks for responding JackBondLove. So do they mean the same thing? Are they just two different ways of describing the same thing?

Yes.

[Flamingo]

I'm new to this forum and I am confused when I read that people's homes are "upside down" or "underwater". What does this mean?

To give you a hypothetical general example...Say you purchased a home in 2004 for $400,000 and mortgaged it for $300,000; over the next year the value soared to over $500,000...you took out a HELOC in 2006 for home additions, new car, whatever, consolidate bills. 2007 hits with the massive drop in values. Your home value plunges in value to say $250,000. You still owe the amount of your original mortgage which will just be little less than $300,000 plus the amount of the HELOC. You are now "underwater" on your home (owing more than the property is worth).