Why is being “upside down” on a mortgage so bad?
I can think of a few reasons why they seem like a bigger deal to people than similar situations with other loans. As you point out, though, being underwater on your home loan is a less serious condition than having large student loans and a poor paying job, for example.  If the student loan situation ever comes to a head, we may have people talking about student loans in hushed tones. The problem comes when the borrower cannot afford his home.  If a borrower buys more home than they can afford, as long as he can sell the house for more than he owes, he's not in a disastrous situation. He can sell the house, pay off the mortgage, and choose more affordable housing instead.  If he is upside-down on his home, he doesn't have that option. He's stuck in his home. If he sells it, he will have to come up with extra money to pay off the mortgage (which he doesn't have, because he is in a home he can't afford). It used to be commonplace for banks to issue mortgages for 100% of the value of the home. As long as the home keeps appreciating, everybody is happy. But if the house drops in value and the homeowner finds himself unable to make house payments, both the homeowner and the bank are at risk. Recent regulations in the U.S. have made no-down-payment mortgages less common. Here's a real-life example of why being underwater can be a tad annoying: Your options are: You must choose one. tl;dr: when everything is going great, it's not really a problem. It's when things change that it's a problem. Finally, home loans are extended over extremely long periods (i.e. 15 or 30 years), making any fluctuations in their value short-lived - even less reason to be obsessed over their current value relative to the loan. Your post is based on the assumption that you never move. In that case, you are correct - being underwater on a mortgage is not a problem. The market value of your house matters little, except if you sell it or it gets reassessed. The primary problem arises if you want to sell. There are a variety of reasons you might be required to move: In all of these scenarios it is a major problem if you cannot sell. Your options generally are: In the first option, you will destroy your credit. This may or may not be a problem. The second is a major inconvenience. The third is ideal, but often people in this situation have money related problems. Student loans can deferred if needed. Mortgages cannot. A car is more likely to be a lower payment as well as a lower amount underwater. Generally, the problem comes when people buy a mortgage assuming certain things - whether that's appreciation, income stability/growth, etc. When these change they run into these problems and that is exactly a moment where being underwater is a problem. "For most people ""home ownership"" is a long term lifestyle strategy (i.e. the intention is to own a home for several decades, regardless of how many times one particular house might be ""swapped"" for a different one.  In an economic environment with steady monetary inflation, taking out a long-term loan backed by a tangible non-depreciating ""permanent"" asset (e.g. real estate) is in practice a form of investing not borrowing, because over time the monetary value of the asset will increase in line with inflation, but the size of the loan remains constant in money terms.  That strategy was always at risk in the short term because of temporary falls in house prices, but long-term inflation running at say 5% per year would cancel out even a 20% fall in house prices in 4 years. Downturns in the economy were often correlated with rises in the inflation rate, which fixed the short-term problem even faster. Car and student loans are an essentially different financial proposition, because you know from the start that the asset will not retain its value (unless you are ""investing in a vintage car"" rather than ""buying a means of personal transportation"", a new car will lose most of its monetary value within say 5 years) or there is no tangible asset at all (e.g. taking out a student loan, paying for a vacation trip by credit card, etc).  The ""scariness"" over home loans was the widespread realization that the rules of the game had been changed permanently, by the combination of an economic downturn plus national (or even international) financial policies designed to enforce low inflation rates - with the consequence that ""being underwater"" had been changed from a short term problem to a long-term one." The largest problem and source of anxiety / ruin for homeowners during the housing market collapse was caused by the inability to refinance. Many people had bought homes which they were stretched to afford, by using variable-rate mortgages.  These would typically offer a very attractive initial rate, with an annual cap on the potential increase of rate.  Many of these people intended to refinance their variable-rate to a fixed rate once terms were more favorable.  If their house won't appraise for the value needed to obtain a new loan, they are stuck in their current contract with potentially unfavorable rates in the later years (9.9% above prime was not unheard of.) Also, many people, especially those in areas of high inflation in the housing market, used a financial device known as a Balloon Mortgage, which essentially forced you to get a new loan after some number of years (2, 5, 10) when the entire note became due.  Some of those loans offered payments less than Principal + Interest! So, say you move near Los Angeles and can't afford the $1.2M for the 3-bedroom ranch in which you wish to live.  You might work out a deal with your mortgage broker/banker in which you agree contractually to only pay $500/month, with a balloon payment of $1.4M due in 5 years, which seemed like a good deal since you (and everyone else,) actually expect the house to be 'worth' $1.5M in 5 years. This type of thing was done all the time back in the day.  Now, imagine the housing bubble bursts and your $1.2M home is suddenly only valued at, perhaps, $750k.  You still owe $1.4M sometime in the next several years (maybe very soon, depending on timing,) and can only get approved financing for the current $750k value -- so you're basically anticipating becoming homeless and bankrupt within the same year. That is a source of much anxiety about being upside-down on a loan. See this question for an unfortunate example. Sample Numbers: Owe $100k on house.  House (after 'crash') valued at: $50K.  Reason for consternation: What rational person pays $100k for property that is only worth half that amount? True Story: My neighbor paid almost $250K (a quarter-of-a-million dollars - think about that..) for a house that when he walked (ran!) away from it was sold by the bank for $88K.  Unless he declares bankruptcy (and forgoes all his other assets, including retirement savings) he still owes the bank the difference. And even with bankruptcy, he may still owe the bank - this should cause anyone to be a bit concerned about being up-side down in a mortgage loan. Being underwater a little is not all that scary, but those who talk of being underwater are typically underwater by quite a lot.  The amount of money they owe is large compared to their yearly income. Consider a metaphor.  I put you in a hole.  Its only 1 foot deep.  You're not too concerned.  If you want to leave, you can step out of it.  Now we look at a deeper hole, 3 feet.  Now you're still not too concerned.  You can't just walk out, but if you need to get out you can wiggle your way up.  6 feet.  Now you start getting nervous.  Climbing out is getting trickier and trickier.  You may not be able to move in response to a changing enviornment around you, because you're stuck in a hole. Now make the hole 10 feet.  Now you can't reach the edges.  Now you're in trouble.  You have lost all mobility.  You can't get out under your own power.  Now if something bad happens (such as losing your job or a sudden health issue), you can't move around to solve the problem. This is the issue that arise from underwater mortgages.  Say you lose your job because the job market in your area dried up (think Detroit in the big auto manufacturer crash).  You need to move.  You are legally endebted to a lender for your existing underwater house by more than you can sell it for.  You need to pay for the privilege to sell it.  You still owe payments on it, so if you just buy a new house (or rent) in the new state, you're paying for twice as much property.  You can't just shuffle the underwaterness from your old house to your new house because the new lender has no interest in giving a loan for more than the value of the new home. The only options you have to play with is renting the old house, which many underwater families did, or bankrupcy.  If the area you were in is depressed, you may not be able to rent the house for enough to cover your mortgage.  This is the fear of being underwater.  You have a piece of paper which claims some lender can take money from you that you may or may not have, and that the US government will allow them to take your assets, if need be, to settle the score. If you're underwater by a few thousand, it's typically not a big deal.  If you're underwater by 80 or 90 thousand dollars, which some people were, that's a lot of money to be endebted for without the assets to recover them. If you subscribe to the realtor story that the market will recover, all you have to do is scrape by, holding on, until the market rises again.  However, those who are underwater recognize that the reason much of this occurred is that we entered a bubble because realtors kept saying the market could only go up.  Fool me once.... And then there is the issue of people who actually don't intend to reduce the size of their loan. They only want to pay the interest, so their debt with the bank remains constant. If you are upside down, it means you will not have the financial means to remove the debt. If, for some reason, you are no longer able to pay the bank, you might lose the house. After that you will have no house, but you still have a debt with the bank. I think part of why it is perceived is so bad is because the fluctuations in housing prices are relatively large, especially compared to the amount needed to put a down payment.  This is not an uncommon scenario: And this is not even being underwater, just being even.  Imagine how much worse it feels if your dream of home ownership has turned into just a pile of debt.
There's nothing wrong with it. Living in a two-family house and renting the downstairs was a fairly standard path to the middle class and home ownership in the 20th century. Basically, if market conditions are good, you'll have someone else paying your mortgage. The disadvantage of the situation is that you're a landlord. So you have to deal with your tenant, who is also a neighbor. Most tenants are fine, but the occasional difficult person may come out of the woodwork. That model of achieving home ownership became less popular in the late 60's-early 70's when the law allowed two incomes to be used for mortgage underwriting. Also, as suburbanization became a national trend, absentee landlords became more common Sounds like you are in the right place at the right time, and have stumbled into a good deal. "Your Spidey senses are good. A good friend would not put you in such a position. It's simple, to skirt some issue (we'll get to that in a second) you are being asked to lie. All for a 15% return on your $$$$. <<< How much is that?  You can easily lend him the money, and have a better paper trail. But the bank is not going to like that, and requires this money from friends or family to be a gift. I've heard mortgage guys at the bank say ""It's just a formality, we need this paperwork to sell the loan to the investors."" These bankers belong in jail, or at least fired and barred from the industry. They broke the economy in 2008, and should be stopped from doing it again." "This seems to be a very emotional thing for people and there are a lot of conflicting answers.  I agree with JoeTaxpayer in general but I think it's worth coming at it from a slightly different angle. You are in Canada and you don't get to deduct anything for your mortgage interest like in the US, so that simplifies things a bit.  The next thing to consider is that in an amortized mortgage, the later payments include increasingly more principal.  This matters because the extra payments you make earlier in the loan have much more impact on reducing your interest than those made at the end of the loan. Why does that matter?  Let's say for example, your loan was for $100K and you will end up getting $150K for the sale after all the transaction costs.  Consider two scenarios: If you do the math, you'll see that the total is the same in both scenarios.  Nominally, $50K of equity is worth the same as $50K in the bank. ""But wait!"" you protest, ""what about the interest on the loan?""  For sure, you likely won't get 2.89% on money in a bank account in this environment.  But there's a big difference between money in the bank and equity in your house: you can't withdraw part of your equity.  You either have to sell the house (which takes time) or you have to take out a loan against your equity which is likely going to be more expensive than your current loan. This is the basic reasoning behind the advice to have a certain period of time covered.  4 months isn't terrible but you could have more of a cushion.  Consider things like upcoming maintenance or improvements on the house.  Are you going to need a new roof before you move?  New driveway or landscape improvements?  Having enough cash to make a down-payment on your next home can be a huge advantage because you can make a non-contingent offer which will often be accepted at a lower value than a contingent offer. By putting this money into your home equity, you essentially make it inaccessible and there's an opportunity cost to that.  You will also earn exact 0% on that equity.  The only benefit you get is to reduce a loan which is charging you a tiny rate that you are unlikely to get again any time soon. I would take that extra cash and build more cushion.  I would also put as much money into any tax sheltered investments as you can.  You should expect to earn more than 2.89% on your long-term investments.  You really aren't in debt as far as the house goes as long as you are not underwater on the loan: the net value of that asset is positive on your balance sheet.  Yes you need to keep making payments but a big account balance covers that.  In fact if you hit on hard times and you've put all your extra cash into equity, you might ironically not being able to make your payments and lose the home. One thing I just realized is that since you are in Canada, you probably don't have a fixed-rate on your mortgage.  A variable-rate loan does make the calculation different.  If you are concerned that rates may spike significantly, I think you still want to increase your cushion but whether you want to increase long-term investments depends on your risk tolerance." Well typically you're borrowing a shit ton of money for 30 years so yeah you're paying a lot in interest over that period.   But your situation sounds especially bad, that's over a 10% constant assuming 80% LTV. What are you being quoted, like &gt;9% interest? "They're not all ""bad at math borrowers"". How would you like it if you applied for a mortgage, very carefully reviewed all the paperwork, and then the mortgage broker simply transposes your signature to another set of documents with different rates?  People got screwed because the companies often screwed them. For every person with zero income who got a home, who's no worse off now than before, there's dozens who got refinanced and later thrown out on the street when their rates magically reset." Many mortgages penalize early payment, and I assume it's possible to disallow it altogether. It makes sense why they don't want early payment. If you pay off the loan early, it is usually because you re-financed it to a loan with a lower rate. You would do this when the interest rate is low (lower than when you got your original loan). If you pay it off early, that means they will have to re-invest the money again, or they will lose money if they just have it sitting around. However, recall above that people pay it off early when the interest rate is low; that is the worst time for them to re-invest this into another mortgage, because the rate will not be as good for them as the one you were originally going to keep paying. Banks and lenders have become a bit more conservative since the housing crisis. 80% is a typical limit. The reason is to minimize the lender's risk if declining property values would put the borrower upside-down on the loan. http://www.bankrate.com/finance/home-equity/how-much-equity-can-you-cash-out-of-home.aspx Wrong way round. Transitional arrangements are non-binding guidelines that the lenders can observe if they choose to. The borrower - like your friend - doesn't  get to choose whether to use them or not. Your friend obviously can't afford the property, so if you do this, all I can say is congratulations on buying your new house, and I hope you got a deal on the mortgage. "I've heard that the bank may agree to a ""one time adjustment"" to lower the payments on Mortgage #2 because of paying a very large payment. Is this something that really happens? It's to the banks advantage to reduce the payments in that situation.  If they were willing to loan you money previously, they should still be willing.  If they keep the payments the same, then you'll pay off the loan faster.  Just playing with a spreadsheet, paying off a third of the mortgage amount would eliminate the back half of the payments or reduces payments by around two fifths (leaving off any escrow or insurance).   If you can afford the payments, I'd lean towards leaving them at the current level and paying off the loan early.  But you know your circumstances better than we do.   If you are underfunded elsewhere, shore things up.  Fully fund your 401k and IRA.  Fill out your emergency fund.  Buy that new appliance that you don't quite need yet but will soon.  If you are paying PMI, you should reduce the principal down to the point where you no longer have to do so.  That's usually more than 20% equity (or less than an 80% loan).   There is an argument for investing the remainder in securities (stocks and bonds).  If you itemize, you can deduct the interest on your mortgage.  And then you can deduct other things, like local and state taxes.  If you're getting a higher return from securities than you'd pay on the mortgage, it can be a good investment.  Five or ten years from now, when your interest drops closer to the itemization threshold, you can cash out and pay off more of the mortgage than you could now.   The problem is that this might not be the best time for that.  The Buffett Indicator is currently higher than it was before the 2007-9 market crash.  That suggests that stocks aren't the best place for a medium term investment right now.   I'd pay down the mortgage.  You know the return on that.  No matter what happens with the market, it will save you on interest.  I'd keep the payments where they are now unless they are straining your budget unduly.  Pay off your thirty year mortgage in fifteen years." In a process called collateralization, your mortgage is combined with others to form a security that other can invest in. When done right, this process provides liquidity, more money to be lent for more loans. When done wrong, bad things happen.  My mortgage happens to be held by the issuing bank. Yours was sold into such a pool of mortgages. One effect of this is the reselling of the servicing of the loan. I've had other mortgages that were sold every year, but I never paid ahead. With this bank, I'm on my fifth refinance, but the bank keeps the loan in house no matter what. I don't know if there's any correlation, it depends on the originating bank, in my opinion. Disclosure: I work for Wells Fargo Home Mortgage.   This is normal. The bank is giving you a discount on the interest rate in exchange for the automatic payments. Unfortunately, the bank has the power here; they have your mortgage, and they have the right to call your loan in full at any time, and foreclose on your house if you don't pony up. It's okay to not like being pushed around, but you need to know when to hold'em and when to fold'em, and your facing a royal flush with pair of 4s. I'm not an expert on reverse mortgages but from my understanding the closing costs are much higher than traditional mortgages and the LTV is generally pretty low. So the bank makes money by not loaning out all that much compared to the value of the property and by charging high fees on the front end. So am I to understand that giving AAA ratings to financial instruments backed by toxic mortgages had nothing to do with this problem?  That selling mortgages with one hand and betting on those mortgages to fail with other is a reasonable business practice?    No doubt the push to give more poor people government backed loans exacerbated the problem, but making that claim that that was the only problem seems about as valid as claiming that Goldman Sachs was responsible for everything. Hey OP, Don't listen to the negative comments, they don't know what they're talking about. I just got hired as an associate i-banker at the top investment bank in my country , which is roughly at the level of American bulge bracket banks.   I'm an introvert. Yes, I like to drink and socialize, and part of the interview process involved cocktails and dinner with other candidates and several ibankers at all levels . But I-bankers are just geeks in suits. As long as you are comfortable in social settings , you don't need to be an alpha male or frat jock.  I recommend meeting as many ibankers as possible. Have coffee chats and learn about the people that work in the industry. Good luck. Stock is a part ownership of a business. First there has to be a business that people want to own part of because they expect to make a profit from that ownership.  Nobody is going to be interested if the business isn't worth anything.  In other words: sure, you could try to start a movie production house to make this film and others... But unless you are already a major player AND already have a lot of money invested in the studio, forget it. This isn't GoFundMe or Kickstarter. Nobody is going to buy stock because they want a copy of the DVD that you promise will be available in two years' time.