Negative Equity |
| Credit: Corporate Finance Institute |
Yes, it exists! What does it mean?
Negative equity 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 current market value of the property and subtracting the amount remaining on the mortgage.
How does it work?
• When current market value of a home falls bellows the amount the property owner owes on their mortgage that owner is then classified as having negative equity in the home.
• The sale of a home with negative equity becomes a debt to the seller, as they would be liable to their lending institution for the difference between the attached mortgage and the sale of the home.
Example
• For instance, say a buyer financed the purchase a $400,000 home with a mortgage of $350,000. If the market value of that home the next year tumbles to $275,000, the owner has negative equity in the home because the mortgage attached to the property is $75,000 greater than what it would sell for in the current market.
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