What is an upside down mortgage?

An upside down mortgage occurs when you owe more on a home than it is currently worth on the market. For example, you purchased a home for $300,000 and financed $270,000 of the value. After one year, you have failed to reduce your principal, and the home is now valued at only $260,000 due to an unfavorable real estate market. If you were to sell the home, you would have to pay the lender additional money outside the home's sales price. An upside down mortgage creates a situation in which you cannot sell your home until the market recovers, or you will lose a substantial amount of money.