What does “underwater” mean in relation to a mortgage?

The term "underwater" in relation to a mortgage specifically refers to a situation where the outstanding balance on the mortgage is greater than the current value of the property. This means that if the homeowner were to sell the property, they would not be able to cover the mortgage debt with the sale proceeds, leading to a financial loss. This can happen due to a decline in property values, making it difficult for homeowners who are in this situation to refinance or sell their homes without incurring significant debt.

Other options may relate to aspects of home equity or property value, but they do not accurately define the underwater situation. For instance, having paid off more than the property is worth or having a mortgage balance that is less than the property's value indicate different financial situations, such as having positive equity or equity build-up. Similarly, a property being in default refers to a failure to meet mortgage obligations, which is separate from the equity status of the property.