Significance

• With the large reduction in overall real estate prices in 2008 and 2009 in the United States, many homeowners quickly became upside down in their mortgage debt. Many borrowers allowed their homes to go into foreclosure and walked away from the bad debt.
  
  

Function

• When a borrower makes a small down payment on a home purchase, or when he borrows close to the value of the home, it is easy to fall into an upside down mortgage situation if housing prices fall even a small amount.
  
  

Types

• If a borrower has an interest-only mortgage, she has only paid the interest owed on the debt and has not built up any equity in the home, other than her down payment. Even if a homeowner makes a down payment, a drop in home values in the first few years of the mortgage can still cause the mortgage to go upside down.
  
  

Considerations

• While the situation may seem bleak for many homeowners, most should consider the fact that home prices fluctuate and could again rise in the future.
  
  

Misconceptions

• Many homeowners facing an upside down mortgage walk away from the home and allow it to fall into foreclosure, assuming there are no repercussions for the action. However, this will prevent them from being able to purchase a home for a minimum of two years, if not longer, depending on the lending rules at the time of application.