A real estate agent friend texted me the other day, and I’ve been thinking about it ever since. She told me about a young couple, expecting a baby, who bought a two bedroom condo in 2022 for $425,000. Right at the top of the market. Now they need to move out of state, and the best they can hope for is $380,000. To make things worse, the tenants who’d been renting it just moved out and left it trashed. This couple doesn’t have the cash to fix it up, and they don’t have the cash to eat the loss either. My friend’s read on it: their best move might be to walk away.
You might not have heard this term since 2008, but this couple is “underwater on their mortgage.” It means you owe more than the home is worth, or more than you’d actually pocket after you sell it, fix it, and pay everyone who gets a cut of the transaction. It’s not a fun club to be in, and lately I’ve been wondering how many people are quietly joining it.
What “Underwater on Your Mortgage” Actually Means
Being underwater on your mortgage sounds simple. Your loan balance is bigger than your home’s value. But real life is messier than that one sentence.
Say you owe $400,000 on a place that would sell today for $410,000. On paper, you’re fine. You’re not underwater. But then you factor in a 6% real estate agent commission, closing costs, maybe some repairs the buyer’s inspector is going to insist on, and suddenly that little bit of “equity” evaporates. You might walk away from closing having to write a check instead of receiving one. That, my friends, is the practical version of underwater on your mortgage, and it catches a lot of people off guard because they were only doing the easy math.
For our couple with the condo, this isn’t even a close call. They’re not $10,000 underwater. They’re looking at a $45,000 gap between what they paid and what they might get, and that’s before you count agent commissions, the cost of repairing whatever the tenants destroyed, and the general chaos of selling a place from another state with a newborn in tow. It’s a genuinely rough spot to be in, and I don’t think anyone should feel embarrassed about ending up here.
“Real estate always goes up.” Ever heard this? Well, no. It clearly does not. 2008 should have taught us this. 2022 made it seem like the sky was the limit, but 2026 is teaching us that what goes up must come down…
Timing the real estate market is basically a coin flip that everyone convinces themselves they can call.
Why 2022 Was Such a Rough Time to Buy
I want to be clear that this couple didn’t do anything wrong. They bought a home in 2022 because that’s when they needed a home. Nobody buys a condo thinking, “This is definitely the top of the market and I will regret this specific decision in a few years.” Hindsight is a jerk like that.
2022 was the tail end of a wild run in home prices. Covid and the new work from home initiatives made people realize they didn’t have to live near work, and they started looking elsewhere. Rates were still low by historical standards for the first part of the year but the Federal Reserve had indicated it would be raising rates later in the year. Inventory was tight. Buyers were bidding over asking price just to get an accepted offer. Like, WELL over asking price.
Once the Fed started raising interest rates aggressively to fight inflation, mortgage rates climbed fast, and suddenly the same monthly payment bought a lot less house. Home price growth slowed or reversed in a bunch of markets, especially the ones that had run up the hardest, like a lot of condo markets that got popular with investors and short term renters during the low rate years.
If you bought in that window with a plan to stay put for ten years, you’re probably fine. Time smooths out a lot of bad timing. But if life throws you a curveball, like a job relocation, a baby, a divorce, a health issue, or anything that forces a sale on someone else’s timeline, you don’t get the luxury of waiting out the market. That’s exactly what happened to this couple, and it’s happening to more people than you’d think.
The Fed, Iran, and Why This Might Get Worse Before It Gets Better
Here’s the part that gave my partner the shivers, and honestly, it did the same to me. The Fed is meeting September 15-16 (literally as I’m writing this article) and the financial markets are all expecting them to raise interest rates by at least 25 basis points.
(I just took a peek at the financial news, and the market is down 400 points, the 10-year treasury hit a yield of 5.04%, a rate it hasn’t seen since 2007, and Oil hit $108 thanks in part to the closure of the Saudi East-West Pipeline that was damaged by drone strikes during the Iran War. In short, there’s a LOT going on right now, and it isn’t all rainbows and unicorns. The market is NOT happy, and it won’t be for a while.)
But I digress. Let’s get back to that probable Fed Rate Hike. That’s not what anyone hoping for relief wanted to hear. Higher rates generally mean higher mortgage rates, which means fewer buyers can afford as much house, which puts more downward pressure on prices in markets that are already soft.
Tensions in the Middle East show no sign of easing, and conflict in that region has a nasty habit of pushing oil prices up. Higher oil prices feed straight into inflation, which is the exact thing the Fed is trying to fight, which brings us right back to the possibility of higher rates. It’s an ugly little loop, and none of it is good news for someone trying to sell a condo they’re already upside down on.
I’m not saying we’re heading for a repeat of 2008. I wasn’t a real estate agent back then, but I was a live in flipper in 2012 with a house on the market before things finally turned around. It took 18 months to sell that house, and we sold it for a LOT less than we had estimated, back in 2007 when we bought it. That whole period taught me that markets are unpredictable, painful for the people caught in the middle, and eventually they do turn. Eventually is doing a lot of work in that sentence, though, and eventually doesn’t help you when you need to move next month.
How Many People Are Actually Underwater Right Now
This is the question that’s been rattling around my head since I read that text. How many other people are underwater on their mortgage right now because of circumstances they couldn’t have predicted back in 2022? A job transfer. A layoff. A new baby that means you suddenly need a third bedroom instead of a second one. A divorce nobody saw coming. Life doesn’t check the housing market calendar before it throws you a curveball. Or maybe it does. When it rains, it pours, right?
Condos bought near the top of the market, especially ones in areas that got popular with short term rental investors or remote workers chasing lower cost of living, seem to be some of the hardest hit. Add in a rough tenant experience like the one this couple had, where you come back to a property that needs real repair money, and you’ve got a situation where selling costs you money instead of making you money. That’s a special kind of financially stressful, and it’s more common right now than most people realize.
It’s Not Always About Equity Either
Not every version of this story involves negative equity, but it can still leave you feeling stuck. I have a friend who bought a house with her husband about 10 years ago, and it was perfect for their family. Two boys, a layout with room to grow, the whole thing. Then they divorced, and she bought out her ex-husband’s share of the equity because the interest rate on the mortgage was so low it would’ve been silly to walk away from it. Now the house is a little too big for just her and the boys, but she can’t sell it, because anything else she’d buy would come with a much bigger monthly payment at today’s rates. She’s not underwater on her mortgage in the traditional sense. Her equity is fine. She’s just locked in by a rate she can’t replace anywhere else, which is its own quiet version of being stuck. It’s a good reminder that “trapped by your house” comes in more than one flavor, and low rates that once felt like a blessing can turn into their own kind of cage when your life circumstances change.
What Your Options Actually Look Like
If you think you might be underwater on your mortgage, or you’re trying to help a friend or family member figure out their options, here’s the general menu, minus the sugarcoating.
Sell now and eat the loss. Sometimes this is genuinely the least bad option, especially if you need to move for a job or a growing family and you don’t have the cash reserves to keep the place afloat as a rental. You write a check at closing, you cry a little, and you move on with your life. It’s not fun, but it’s clean, and clean is worth something when you’re already juggling a lot.
Rent it out and wait. This can work if you have the cash flow to cover the mortgage even with a below market rent, and if you’re not in a rush. The catch, as this couple learned, is that being a landlord from a distance is its own gamble. Tenants can trash a place, and then you’re stuck paying for repairs on top of everything else. If you go this route, budget for repairs like they’re guaranteed, not just possible.
Try a short sale. If you truly can’t afford the gap between what you owe and what the home will sell for, and your lender agrees, a short sale lets you sell for less than the loan balance with the lender’s blessing. It’s a process, and it can ding your credit, but it’s usually less damaging than a foreclosure and it gets you out from under the property.
Walk away. This is the option my friend floated for her clients, and it’s the nuclear option for a reason. Walking away, meaning stopping payments and letting the home go to foreclosure, can wreck your credit for years and might have tax consequences depending on your state and situation. It should be a last resort, not a first instinct, and anyone considering it should talk to a real estate attorney and a tax professional before pulling that trigger, not after.
Negotiate with the lender. Loan modifications, forbearance, and other lender programs exist for a reason. They’re worth a phone call before you assume your only choices are sell at a loss or default. Lenders generally would rather work something out than take a home back, foreclosures are expensive and slow for them too.
The Bigger Lesson Hiding In This Story
I keep coming back to how normal this couple’s story is. They didn’t do anything reckless. They bought a home when they needed one, at a price that made sense at the time, with the information they had. Then life changed, the market shifted, and now they’re navigating a genuinely hard financial decision through no fault of their own.
If you’re reading this and you bought near the top in 2022, or any other peak year, and you’re feeling nervous about your equity situation, you’re not alone, and you’re not dumb for being here. The market did what markets do. It moved. Sometimes it moves against you right when you need it to move for you.
What you can control is how you respond. Run the actual numbers instead of guessing. Talk to your real estate agent about a realistic sale price, not a hopeful one. Talk to a financial advisor or tax professional before you make an irreversible move like walking away from a mortgage. And give yourself some grace. Being underwater on your mortgage is a math problem and a market problem, not a character flaw.
I hope this couple lands somewhere safe, with a healthy baby and a lot less financial stress than they have right now. And I hope if you’re in a similar spot, this gave you a clearer picture of your options instead of just more things to worry about.
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