Underwater Mortgage Calculator

It means you owe more on the loan than the home is worth. With the calculator's defaults, a $380,000 balance on a $375,000 home, that's $5,000 of negative equity. The number that matters when you sell is bigger, though, because selling has its own cost. At 8% in commissions and closing costs, a $375,000 sale nets about $345,000, which leaves you $35,000 short of paying off the loan. A homeowner can be effectively underwater with some equity on paper. Any time the balance is above roughly 92% of value, a traditional sale needs cash at closing.

The lender has to be paid in full before it releases its lien, so the buyer can't get clear title until the shortfall is covered. You bring the difference to closing: the negative equity plus every selling cost that comes out of the proceeds, including agent commissions, title and escrow fees, and any transfer tax. On the default figures that's $35,000 in cash. If you don't have it, the sale can only close if the lender agrees to take less (a short sale), or if the loan stays in place (a subject-to sale).

There are six common ones, each with a different cost. (1) Stay and keep paying. Negative equity only costs you money when you sell, and it shrinks as you pay down the loan and if values recover. (2) Sell and bring cash to closing. (3) A short sale: the lender accepts less than it's owed. You need the lender's approval, it damages your credit, and depending on your state and loan the lender may be able to pursue the remaining balance. Forgiven debt can also count as taxable income unless an exclusion applies. (4) A loan modification, if the problem is the payment rather than the equity. (5) Rent the home out, if the rent covers the payment. (6) A subject-to sale, where a buyer takes the house and makes your payments while the loan stays in your name. This calculator puts a number on option 2 against option 6. For a short sale or a modification, talk to your servicer and a HUD-approved housing counselor, which is free.

A sale where the buyer takes the deed "subject to" your existing mortgage. The buyer owns the house and makes the payments, but the loan is never assumed or refinanced, so it stays legally yours. The buyer doesn't qualify with your lender and the lender doesn't approve the transfer. That's what makes it fast, and it's also where the risks below come from. It isn't the same as a formal loan assumption, where the lender approves the buyer and can release you from the debt. Some FHA, VA, and USDA loans allow a formal assumption, so check before choosing subject-to.

It gets you out of the house without bringing cash to closing. Because the loan isn't paid off, there's no shortfall to cover, and with no listing there's usually no commission. On the default figures, that's the $35,000 you avoid bringing: $5,000 of negative equity plus about $30,000 of selling costs. What it doesn't do is end your obligation. The loan is still yours until it's paid off or refinanced. The buyer making the payments is a promise backed by a contract, not a release from the lender.

Four big ones, and they fall mostly on you, not the buyer. (1) Your credit rides on someone else's payments. If the buyer pays late or stops, the late marks and any foreclosure go on your credit report, and you may not find out until the damage is done. (2) The loan still counts as your debt. When you apply for your next mortgage, the lender may include this payment in your debt-to-income ratio even though you no longer own the house. (3) The due-on-sale clause. Most mortgages let the lender demand the full balance when the property is transferred. Federal law (the Garn–St Germain Act) exempts transfers such as to a spouse or a living trust, but not a sale to an investor. Whether a lender actually calls a loan is up to the lender, and nobody can promise it won't. (4) Insurance: the policy has to be restructured so the house stays insured and the lender still sees coverage. Sellers protect themselves with a written agreement, a third-party servicer who makes the payments and gives you access to confirm them, their own login to the loan account, and a real estate attorney who reviews the deal before signing. Some states also have equity-purchaser or foreclosure-rescue laws that apply when the home is already behind on payments.

The cash you don't bring to closing: your negative equity plus the selling costs you'd have paid. Enter your balance, your home's value, and your selling-cost percentage above, and the calculator shows both parts. On the defaults ($380,000 owed, $375,000 value, 8% selling costs) that's $5,000 plus $30,000, or $35,000. Read that figure as money kept today, not a gain. You also give up any future appreciation, and you keep the liability described above until the loan is gone. If you're only slightly underwater and can afford the payment, staying a few years and letting principal paydown close the gap is often cheaper than either option.