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You can estimate the value of your home using three different measures: assessed value, fair market value and appraised value. When any of these values fall below your mortgage's outstanding balance, real estate industry professionals may refer to your mortgage as "upside down," which can cause a variety of problems for homeowners.
A home's assessed value is an estimate of the worth of your home as determined by your local taxing authority. The taxing authority uses this value to calculate the property tax you owe each year, and it may change from one year to the next. Appraised value is a qualified appraiser's opinion of your home's worth, and fair market value is the amount a typical buyer is willing to pay to purchase your home. All three estimates of a home's value should be similar to one another. Finally, the balance of your mortgage is the amount you still owe to the lender who financed your home.
When you refinance your mortgage, the lender grants you a new loan equal to or greater than your current mortgage loan. If the balance of your mortgage exceeds your home's assessed value, the lender may be unwilling to grant you a refinance loan large enough to cover what you owe on your current mortgage. Because a cash-out refinance requires an even larger loan amount, upside-down mortgages rarely qualify.
Selling Your Home
When you sell your home, the buyer won't typically pay more than the home's fair market value, which will be similar to its assessed value. If your mortgage is upside down, a purchase price equal to your home's assessed value won't be sufficient to cover the amount you owe on your mortgage. Since you must repay the full amount of your mortgage before you can transfer the home's title to someone else, you must pay the remaining balance from your own funds.
If the amount you owe on your mortgage is more than the assessed value of your home, you may qualify to reduce your principal through loan modification. You may also be able to reduce your monthly payment with a short refinance, which involves refinancing a balance higher than the assessed value of your property. If you can't afford to stay in the home, your lender may allow a short sale. Under a short sale, the lender agrees to accept a payoff less than the balance of your mortgage, thus allowing you to sell the home for fair market value. However, a short sale may harm your credit score.