Underwater Asset

Underwater asset summary:

• An underwater asset is an item of value like a house or car that's worth less than the balance of the loan you took out for it.

• Having an underwater asset means you’d likely lose money if you tried to sell the asset to repay the loan.

• Sharp declines in asset values, such as housing market downturns, can quickly create an underwater asset.

Underwater Asset Definition and Meaning

An underwater asset is worth less than the balance of the loan you took to purchase it. 

Any asset that loses enough value that it’s worth less than what you owe on them is considered underwater. Homes, cars, and stocks are the purchases most often cited underwater to define an underwater asset.

Underwater assets are typically houses, but the term is also used to describe cars, stocks, or anything of value. An underwater asset can be difficult to sell or refinance.

Other terms for this loss in value are negative equity and upside down. 

Like houses, cars are considered underwater when the loan principal is greater than the appraised value. Stocks are underwater when the current price drops persistently below its purchase price. 

More on Underwater Assets

Suppose you bought a $300,000 home with $15,000 down and a $285,000 mortgage. And that a year later, you'd paid your balance down to $280,000. But the housing market crashed and your home value dropped to $270,000—$10,000 less than what you owed on the property. Your home became an underwater asset. 

Key Features of Underwater Assets

Whether stocks, condos or cars, underwater assets have several similar features:

• Negative equity. You owe more on the asset than it’s worth.

• Difficult to sell. Selling the asset probably won’t cover the loan balance.

• Market-dependent. Value rises and falls, depending on market conditions.

How to solve for underwater assets

Raising your asset’s value or reducing what you owe can lift your asset above water. 

Raising your asset’s value. You can raise an asset’s value actively, such as by remodeling a home for $20,000 and adding $50,000 to the appraised value. Doing so successfully can remove underwater status. However, many home improvements cost more than the value they add. Do your research (and make sure you can afford the investment) before going this route. 

Market changes can raise your asset’s value. In a seller’s market, the value of your home may eclipse what you owe. If you buy a $400,000 home for $410,000, and your home’s value rises to $420,000, it’s no longer underwater. Often, an asset’s value depends on unpredictable markets. However, autos and other assets rarely appreciate.

Reducing what you owe: Paying down your loan quickly can also put you above water. When you owe $500,000 on a $450,000 home, and reduce your loan principal to $450,000 or less, your equity becomes positive. 

In any case, underwater assets that aren't real estate are frequently underwater, especially in the first years of ownership. That isn't generally a problem unless they're investments or you plan to sell them in the near future. It's important that when you purchase things you need, like cars, that you can afford the payments and make them on time, and that the length of the loan won't exceed the useful life of the asset.