What defines an "underwater mortgage"?

An underwater mortgage is defined specifically as one in which the borrower owes more on the mortgage than the current market value of the property. This situation often occurs during times of economic downturn or real estate market declines, where property values fall significantly compared to the amount borrowed. When a homeowner finds themselves in this position, they face challenges in selling the home or refinancing it without incurring a loss.

The other options do not capture this essential characteristic of an underwater mortgage. A mortgage with an interest rate below market value pertains to the interest rate itself rather than the valuation of the property. A mortgage where the borrower owes less than the property value indicates a positive equity situation, which is the opposite of being underwater. Lastly, stating that a mortgage cannot be refinanced does not directly relate to the value relationship between the mortgage and the property, making it irrelevant to the definition of an underwater mortgage. Thus, focusing on the imbalance between what is owed and the property's worth is crucial to understanding why the correct answer reflects the definition accurately.