What factor primarily defines an underwater mortgage?

An underwater mortgage is primarily defined by a decrease in property value that results in the borrower owing more on their mortgage than the current market value of their home. This situation often arises in declining real estate markets where property values plummet due to economic factors, leading to circumstances where homeowners find that selling their property won't cover the outstanding balance of their mortgage.

In contrast, a growing real estate market typically would reflect increasing property values, which would negate the underwater status. High interest mortgage rates and the structure of the mortgage itself, like whether it’s a fixed-rate or adjustable-rate loan, do not directly define an underwater status but rather influence payment amounts and borrower affordability. Therefore, the crux of an underwater mortgage hinges on the relationship between the property's market value and the outstanding mortgage balance, solidifying the relevance of property value decline as the defining factor.