An “underwater” mortgage2 is when the balance of the mortgage loan is higher than the fair market value of the property. This type of situation became common following the housing market crash that occurred in the late 2000s when many homeowners saw their homes lose a considerable portion of their value.
Negative equity can cause you real problems if you need to sell your home, refinance it, or borrow using a home equity loan or home equity line of credit. Indeed, if it is preventing you from refinancing to a lower rate, and that means you are struggling to keep up with your existing monthly payments, it might put you in greater danger of foreclosure.
However, absent those, having a mortgage that's underwater need hardly bother you. How does it affect your day-to-day life? True, you lack that lovely warm feeling you used to get from knowing your home was quickly contributing to your net worth. And, if you dwell on it, you could get depressed that home has actually reduced that net worth. But, if you have a glass-half-full disposition, and recognize your losses are all on paper, you may well not think about your mortgage's situation from one month to the next, though, you should always look out for ways to improve your financial situation.