Underwater on Your Home or Car Like Millions of Americans? Here’s What To Do Next
Owning a home or car feels like a win, right up until you realize the thing you’re paying for is worth less than what you still owe on it. Millions of Americans are in that exact spot right now.
According to data from Cotality, U.S. homes with negative equity climbed 15% to 1.1 million. For vehicles, nearly 3 in 10 trade-ins involved negative equity in the second quarter of 2026, with borrowers owing an average of $6,884 more than their cars were worth, according to Edmunds.
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Being underwater isn’t a financial emergency, but it can turn into one the moment you try to sell, trade in or refinance. The good news is that you have more options than you might think, and the right move usually comes down to giving yourself time rather than making a rushed decision.
Why So Many People Are Underwater
For homeowners, the problem often starts with a small down payment and a mortgage that hasn’t had time to chip away at the principal.
As Austin Kilgore, an analyst with the Achieve Center for Consumer Insights, put it, “Markets in some areas of the country have cooled, and in those where housing prices had gained quickly, some homeowners who bought at peak periods are now underwater.”
Cars got hit by a different combination. According to Glenn Harwood, founder and CEO of Autobahn Alpha, the pandemic created a “perfect storm” for negative equity. Prices spiked between 2021 and 2023, interest rates climbed and lenders started offering loans stretching out to seven years. Those longer terms kept monthly payments manageable, but they also slowed how fast borrowers paid down the balance while the vehicle kept losing value.
Steven Cegelka, COO of Ignition Dealer Services, pinpointed the problem: “Cars lose value fastest early in the ownership cycle, while those longer loans pay down principal slowly.”
What To Do If Your Home Is Underwater
Being underwater on your home doesn’t necessarily mean you need to sell.
According to Kilgore, “If [your] budget can comfortably accommodate the monthly payment, and [you] don’t have an immediate need to move, it generally makes sense to stay and continue paying down the mortgage."
Extra principal payments can shrink the gap over time. If you do need to sell, savings may cover the difference between the sale price and what you owe. If savings won’t stretch that far, a short sale with your lender could be an option.
Refinancing isn’t always the fix, either. If you locked in a low rate years ago, swapping it for today’s higher rate could cost you more than the equity you’d gain.
“For the many, many homeowners who secured a very low mortgage rate several years ago, it would not make financial sense to refinance at today’s rates,” Kilgore said.
What To Do If Your Car Is Underwater
If you're upside down on an auto loan, find out the facts first, like how much you owe and what your car is worth, before making any decisions.
“If the car is reliable, keeping it longer and making additional principal payments is usually the cleanest route,” explained Cegelka.
Holding onto the car longer allows you more time to get the loan balance down while avoiding rapid depreciation on a newer car.
If you have to replace it, Cegelka recommended covering the “shortfall in cash,” choosing a less expensive vehicle, asking whether you can refinance your current loan or comparing trade-in offers from several dealerships.
Think Twice Before Rolling Negative Equity Into a New Loan
Folding negative equity into a new auto loan means financing your old balance on top of the new car, which increases what you owe and adds interest.
Harwood said, “The two biggest mistakes are changing cars too quickly and rolling it over without paying it off.”
If you need a new vehicle, Cegelka suggested looking at the entire deal rather than the monthly payment.
“Focusing only on the monthly payment can hide how much old debt is being carried forward,” he said.
Before signing, review the trade-in value, loan payoff amount, negative equity, interest rate and total amount financed as separate numbers. A payment that looks affordable can still be hiding an expensive deal.
The Bottom Line
Negative equity is a snapshot, not a verdict. If your home or car still fits your life, hold on and pay it down faster when you can. Only make a swap when the new arrangement actually improves your situation, not just reshuffles the same debt into something shinier.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
