When you buy a home, you expect it to increase its value over time. But what if that’s the opposite? If it depreciates, you may end up in a state of negative fairness. Let’s take a look at this state, alias, how it happens to be upside down or underwater, and what can be done if it is done.
What does negative equity mean?
Negative equity means your home is less than your outstanding balance on your mortgage and/or any other liabilities associated with it.
What we consider home equity (and generally just “equity”) is the difference between the market value of your home and the amount paid for it. This represents the amount of a home where you are completely free and exempt from mortgages and other home-secured loans.
When you buy a house, your down payment amount is the immediate fairness of the home. After that, when you make a mortgage payment, your ownership interest (aka your shares) increases each month, and your lender becomes smaller. As the value of the real estate/real estate market increases overall, the value of individual homes increases, and this appreciation also increases stocks.
Home equity is determined by obtaining the valued value of your property and subtracting your outstanding mortgage balance. The higher it is, the more positive fairness it represents. But say the number is below zero: your home is few More than your mortgage balance.
As a result, you will end up paying more for your home than it’s worth, and your ownership value is zero. You have negative fairness and is also called upside down on an underwater or mortgage.
How to calculate negative equity
To understand whether your home is negatively fair, start by determining the current market value of your property. Next, check your latest mortgage statement to find your remaining balance. Subtract it from the value of your home, and that’s the amount of fairness you have.
Causes of negative fairness
From economic changes to individual choices, it can end up underwater for several reasons.
Recession
Wide range of negative equity is usually the result of a serious economic obstacle, such as a recession or depression, or a sudden rupture of a housing bubble (a sharp, speculative spiral of home prices). For example, when property values fell by a third during the Great Recession, many homeowners across the United States were upside down on mortgages. In fact, the recession began with real estate: in the 2006-07 subprime mortgage crisis, widespread defaults in mortgages caused problems throughout the financial industry, ultimately causing the economy. The Great Recession technically lasted until 2009, but it took several more years for the home’s property value to fully recover from its 33% plunge.
If natural disasters that undermine the local economy and property values are hit, housing market depression and recessions can occur across states and cities, and at a more local level.
Personal financial choices
At the individual level, there are several scenarios where negative fairness can occur, such as:
- You create a small down payment (or no down payment at all), and home prices will fall modestly shortly after moving in. For example, if the asset value fell by 10% and the value of the property fell by 5%, you lost 50% of your stock.
- The selling price will rise significantly (for example, market height)
- Later in mortgage payments and accumulated interest and penalties
- For example, oppose your equity by taking out a big home equity loan or home equity credit line – then experience a decline in real estate value
The impact of negative equity
So what does negative fairness mean for homeowners? It’s scary as you can hear, that may actually mean nothing. “Negative equity isn’t necessarily a bad thing for most people unless you’re planning on selling or refinancing your home in the near future,” says Kencisson, a Los Angeles-based real estate agent and an associate broker at Caldwell Bunker Realty in Studio City, California.
If you intend to stay in your home for the long term and can continue to pay your full mortgage on time, negative stocks should not affect your credit or your finances. It’s a paper loss – and in reality, you may not notice it.
But if you need to sell your home, it can put you at a financial disadvantage.
If you want to sell
If a home changes its hands, the old homeowner will have to pay back the current mortgage. Most people need revenue from sales to do so. But with negative fairness, you’re not enough. “In that case, the amount you get from selling the property is not enough to meet your mortgage payments. You will need to pay back the additional mortgage balance.”
If you can’t afford to pay the difference between your current home value and the remaining mortgage balance, your lender may need to ask if you would like to consider short selling. Under this arrangement you can sell your home and spend money on your mortgage whatever it fetches (even though it doesn’t cover the entire mortgage). The loan provider then allows the remaining balance.
You won’t pay your lender any debts, but short sales can hurt your credit score and won’t make you aware of the profits from your home sales. They are also not easy or quick to arrange, and can add several months of time to sell your home.
If you want to borrow more
Refinance can also be challenging if it is underwater. Because lenders usually can’t borrow money without equality in your home. And of course, you can forget to take out your home equity loan, HELOC, or any other debts placed in your home. Instead, you may need to wait until your home value increases or until you have fully repaid your loan to reach positive equity again.
Negative fairness isn’t necessarily a bad thing unless you plan to sell or refinance in the near future.
– Ken Sisson
Realtor and Associate Broker Coldwell Banker Realty
How to avoid negative fairness
When you enter negative equity, you are not always within control (after all, you can’t predict the ups and downs of the local real estate scene), but there are a few ways to protect yourself from it. Here are some strategies to avoid going underwater:
- When purchasing a home, shop on a budget and don’t take on a mortgage larger than you can afford or really need.
- Create a bigger down payment and advance the larger slice of equity.
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Prepay your mortgage and build equity faster.
- Invest in your home with strategic renovation projects that will increase market value, such as additional bathrooms and upgraded kitchens.
How to manage negative fairness
Unfortunately, we cannot immediately reverse negative fairness. However, there is a way to get out slowly.
Get on the market
The easiest option is to ride the market slump until property values rise again (real estate tends to be grateful in the long term). Continue to pay your mortgage, reduce your debt and increase your ownership shares.
Pay off your mortgage faster
If your lender allows it – and if you can afford it, you will consider making additional payments to the principal of your loan each month to reduce payments faster or greater than your monthly (make sure that extra money is sent to the principal of the loan, as well as the interest).
Enhance your property values
While you are doing it, you can also work it from the other side by increasing your asset value. Of course, I don’t want to bear a lot of fresh debt, but there are many improvements that are pretty low in ROI but have a lot of improvements with a large return on investment (ROI): Installing or repairing hardwood floors, upgrading garage or front doors, replacing old appliances, sprucking outdoor spaces are all great ways to increase the appeal and value of things.
At the very least, invest in regular maintenance and maintenance. Unless it’s a very hot seller’s market, the tinsel condition of an individual home can be cancelled with a general appreciation of home prices.
Negative Equity FAQ
Additional Reports by Maya Dollarhide
