What Is Negative Equity?

Negative equity occurs when the value of real estate property falls below the outstanding balance on the mortgage used to purchase that property. You can calculate whether you have negative equity by subtracting your outstanding 澳洲幸运5开奖号码历史查询:mortgage loan balance from the property's current market ✱value.

How Negative Equity Works

To understand negative equity, we'll start by explaining positive equity, also known simply as 澳洲幸运5开奖号码历史查询:home equity. 

Home Equity

Home equity represents the value of a homeowner’s interest or ownership in their home. It is the property’s current 澳洲幸运5开奖号码历史查询:market value, les🐻s any liens or encumbrances attached to the property. The equity value fluctuates⛎ over time as you make mortgage payments, which reduces your loan and increases your equity. Your home equity also fluctuates due to changes in your home's market value.

If you finance the purchase of your home using a mortgage, the bank, 澳洲幸运5开奖号码历史查询:credit union, or lending institutᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚion has an interest in the home until you pay off the loan. Home equity represents the portion of your home's curreꦑnt value that you own free and clear.

How To Increase Home Equity

You can increase your home equity by making a larger 澳洲幸运5开奖号码历史查询:down payment during the initial purchase of the property. You also increase your home equity as you make your mortgage payments since a portion of each payment goes to paying interest to 澳洲幸运5开奖号码历史查询:the lender and a portion to the principal loan balance.

Over time, you reduce the outstanding principal owed, increasing your home equity. A rise in your property's value can also boost your home equity. In short, as long as the difference between your mortgage loan and the property value of your home increases, your home equity increases.

How Negative Equity Is Calculated

When the current market value of a home falls below th✱e amount the property owner owes on their mortgage—that owner is then♏ classified as having negative equity in the home.

Let's say that Sally bought a home worth $400,000 by financing $360,000 and putting a down payment of $40,000.

• Purchase price: $400,000
• Down payment: $40,000
• Loan value: $360,000

A few years later, Sally owes $340,000 due to her mortgage payments, but the housing market declined, lowering the value of her house to $300,000. Let's calculate the negative equity.

• Current loan value: $340,000
  
• New home value: $300,000
• Home equity value: -$40,000 or ($300,000 market value - $360,000 loan amount)

As a re✃sult, Sally has $40,000 in negati🉐ve equity.

The sale of a home with negative equity becomes a debt to the seller since they would be liable to their lending institution for the difference between the outstanding mortgage balance and the proceeds from the sale of the home. In other words, Sally, from our example, would need to pay the bank $40,000 to sell her home.

Negative Equity's Economic Implications

Negative equity can occur when a homeowner purchases a house using a mortgage but experiences an event that causes real estate values to fall, such as the collapse of a hou🎃sing bubble, recession, or depre💜ssion.

For example, let's say a 澳洲幸运5开奖号码历史查询:homebuyer financed the purchase of a $400,000 home with a mortgagꦬe of $350,000. If the market value of that home the following year tu𒊎mbles to $275,000, the owner has negative equity in the home because the mortgage attached to the property is $75,000 greater than the current market value of the home.

Impact on the Borrower

Borrowers with negative equity can have fewer financial options, such as the inability to refinance the mortgage. Also, the borrower may not be able to sell the home without tak🐠ing a financial loss for the amount of negative equity. Homeowners with negative equity might find it more difficult to actively pursue work in other areas or states due to the potential losses incurred from the sale of their homes.

澳洲幸运5开奖号码历史查询:Credit score damage can occur if the 澳洲幸运5开奖号码历史查询:borrower struggles and falls behind on the payments, leading to 澳洲幸运5开奖号码历史查询:challenges with getting approved for new credit. Default and foreclosure can occur if the borrower loses their job or experiences a decline in income. As a result, borrowers can face significant financial stress and anxiety.

Impact on the Economy

Banks dealing with borrowers who ꩲhave defaulted or foreclosed on properties can lead to losses, hurting their ability to make new loans and reducing the liquidity or money supply in the economy.

The lack of spending from consumers who have negative equity can decrease economic growth. I𝕴f negative equity has occurred due to a housing crash in prices, severe consequences can include higher foreclosures, unemployment, and recession.

The government would also need to contribute more financial aid to help 澳洲幸运5开奖号码历史查询:struggling borrowers make their payments, avoid foreclosure, or pay for the increase in unemployment insurance claims, putting a strain on federal, state, and local finances.

Underwater mortgages were a common problem among homeowners around the height of the financial crisis of 2007–2008, which, among other things, involved a substantial deflation in housing prices. As the subsequent onset of the 澳洲幸运5开奖号码历史查询:Great Recession proved, the widespread epidemic of negative equity across the housing market can have far-reaching implications for the economy as a whole.

Special Considerations

Negative equity differs from 澳洲幸运5开奖号码历史查询:mortgage equity withdrawal (MEW), which represents removing home equity through a loan against the 澳洲幸运5开奖号码历史查询:property's market value. A mortgage equity ෴withdrawal reduces the real value of a property by the number of new liabilities against it bu෴t does not represent negative equity.

The Bottom Line

If you're 澳洲幸运5开奖号码历史查询:underwater with your mortgage, it typically means you have negative equity. In other words, the property value of your house has declined so much that it represents a lower value than the total amount you owe on your mortgage loan. Negative equit⭕y can occur following a housing bubble burst, a recession, or a depression. Negative equity can make it challenging to sell your home.