Underwater mortgages -- loans on which the amount owed exceeds the property's value -- have posed a serious hardship for many homeowners in recent years. Fortunately, conditions are right for more and more of these loans to emerge from their underwater state.

In many cases, being underwater shouldn't be a big problem for a homeowner. Real estate should be viewed as a very long-term investment, and what matters in the short term is how affordable your mortgage is. However, an underwater mortgage can cause problems under the following circumstances:
  • When home owners need to sell the property.
  • When home owners can't afford their mortgage payments, either because of a financial setback or because they over-reached on their original loan.
  • When home owners were looking to "flip" a house for a quick investment gain.

But luckily for people in these circumstances, signs have appeared lately that more underwater borrowers may soon get a break.

Underwater mortgages finally get some relief

A report from CoreLogic indicated last month that the number of underwater mortgages recently declined to its lowest level in three years. What is even better news is that conditions look right for more mortgages to emerge from underwater status soon.

Here are three things that may throw a lifeline to underwater mortgages:
  1. Rising home prices. The S&P/Case-Shiller Home Price Index has now risen for five straight months. The gains are modest -- nothing that would be confused with the real estate boom of the previous decade -- but even slow progress will steadily help bring the value of homes above the remaining mortgage debt.
  2. Time and amortization. As noted above, rising home prices are helping mortgages emerge from underwater, but even if home prices just broke even, time and amortization would help the problem. After all, most mortgages are designed to reduce debt month after month, with the amount of debt reduction accelerating as the mortgage ages. So, as long as home prices don't start falling again, in this case time really does heal.
  3. Low interest rates. It's a fundamental bit of mortgage math -- a lower interest rate on a mortgage pays down principal more quickly in the earlier years of the loan. With current mortgage rates below 4 percent, today's mortgages build equity more quickly than they have historically. While the rub is that many home owners haven't been able to take advantage of current mortgage rates because their loans are underwater, now there are more government programs that allow some borrowers to do just that. Lowering their interest rates should help these borrowers get their loans out from underwater more quickly.

Although you wouldn't know it from some of the national media coverage, a wide majority of mortgages are above water, and of those that aren't, there were nearly 2 million that were only 5 percent underwater at the end of the first quarter of 2012, according to the CoreLogic report. Current conditions suggest many of those mortgages should be emerging from underwater soon, even without a major rally in real estate prices.