What Is Negative Equity?
Negative equity is a situation that occurs when the value of real estate property falls below the outstanding balance on the mortgage used to purchase that property. Negative equity is calculated simply by taking the property’s current market value and subtracting the amount remaining on the mortgage.
If you have an interest-only mortgage, you are more at risk of negative equity than when one has a repayment mortgage. The is because your monthly payments don’t go towards reducing the value of your debt, only towards the interest, so the interest reduces more than the loan.
Property is in negative equity if it is worth less than the mortgage you have on it, and is normally caused by falling property prices, which can be due to foreign exchange.
It’s estimated there are around half a million properties in negative equity in the UK, although some areas are affected more than others. According to CoreLogic, an estimated 23 percent of Americans owe more on their mortgages than their homes are worth or have “negative equity”.
How to know if one is in negative equity.
One may be probably unaware of the negative equity as it is not something one would think of till they are ready to move to another property.
1. First, you have to check your mortgage statement or contact your lender to find out how much you currently owe.
2. Next, ask a local estate agent to value your home or hire a surveyor to do a valuation; this service is usually paid for.
3. If the property value is below what you owe, then you are in negative equity.
It is also when a company’s liabilities are more than its assets.
Negative Equity Example
When Mrs. Sharon got her apartment, it was worth $250000 with a mortgage of $230000. After 15 years of living there and about to move to the countryside, she discovered the apartment is now worth $200000, putting her in negative equity.« Back to Glossary Index