What is Negative Equity?

Negative home equity refers to a situation in which the outstanding balance on a homeowner’s mortgage exceeds the current market value of their property. This can occur when the value of the property decreases, the mortgage balance increases, or a combination of both.

One of the main causes of negative home equity is a decline in property values. This can happen due to a variety of factors, such as a decrease in demand for housing in a particular area, an oversupply of properties on the market, or economic downturns. When property values decrease, homeowners may find that the value of their property is less than the amount they owe on their mortgage, resulting in negative equity.

A lot of the headlines you will read lately elude to the fact that there are many who purchased homes in early 2022 that are now “under water” as they now have negative home equity.  This s really only going to affect those that all of a sudden need to sell again.  Those that are planning on staying for a few years might see that negative equity shrink as prices normalize and supply/demand starts to be the driving force in the market again.

Another cause of negative home equity is an increase in the mortgage balance. This can occur when homeowners take out a second mortgage or refinance their original mortgage with a higher balance. Additionally, some homeowners may fall behind on their mortgage payments, resulting in late fees and penalties that can increase their mortgage balance.

Negative home equity can have serious financial consequences for homeowners. For example, homeowners with negative equity may find it difficult to refinance their mortgage or sell their property, as they would need to bring money to the closing table to cover the difference between the mortgage balance and the sale price. This can make it difficult for homeowners to move or access the equity in their property.

For those who purchased a home in 2022, it’s essential to remember that owning a home is a long-term investment and not a short-term gain. The media’s focus on short-term market conditions may not provide a complete understanding of the situation. Typically, as a homeowner stays in their home, they will gain more equity over time through paying down their mortgage and as home prices increase. However, due to recent market conditions, some homeowners may not have gained significant equity immediately after purchasing their home. It is worth noting that many homeowners who recently purchased their homes may not be looking to sell in the short-term.