What does it mean for a mortgage to be "underwater"?

When a mortgage is described as "underwater," it means that the homeowner owes more on their mortgage than the current market value of the property. This situation usually arises when property values decline, often due to market downturns or economic factors, leaving the homeowner in a position where selling the property would not cover the outstanding mortgage balance. This can create significant financial challenges for the homeowner, as they may be reluctant to sell or may face difficulty in refinancing their loan.

In contrast, the other options do not accurately capture the essence of being "underwater." A mortgage being paid off means that there is no debt remaining, which is the opposite of being underwater. A high interest rate refers to the cost of borrowing but does not relate to the value of the property versus the mortgage amount. Lastly, a loan in default means that the borrower has failed to meet the repayment terms, which can occur regardless of whether the mortgage is underwater or not.