What is Negative Equity?
Home equity represents the portion of your homes value that you truly own in comparison, to the amount that has been financed. Your equity is constantly changing as your homes value goes up and down and as you make payments on your loan. If the value of your home decreases below the balance on your loan you end up with equity.
Determining Your Equity
To figure out whether you have negative equity start by assessing your homes value and then determining your remaining loan balance. The disparity between the value of your home and what is left to pay on your loan will indicate whether you have negative equity.You can ask a local real estate agent for a personalized analysis typically offered free of charge. You can also check your mortgage statement for information, on your loan balance. Calculate it yourself based on the specific amount borrowed and interest rate.
Exploring Two Scenarios
Lets consider two scenarios to better explain how positive equity and negative equity are calculated. When you first buy a property positive equity equals the size of your payment.
If you purchased a house for $300,000, with a payment of 20 percent amounting to $60,000 and took out a 30 year fixed rate mortgage at 4 percent you would own 20 percent equity in your property. If the value of your home increased to $325,000 within the two years you would hold an equity of 28.8 percent totaling $93,625.
This positive equity consists of three elements;
- $25,000 represents the increase in equity due to the appreciation of your home
- $60,000 is the equity derived from your payment of 20 percent
- $8,625 is the equity accumulated from paying off your loan (just by making regular mortgage payments) resulting in a remaining loan balance of $231,375 after two years.
- On the side if economic conditions such as a recession led to the value of your home dropping to $225,000, over two years you would experience equity of 2.8 percent amounting to $6,375.
There are three factors contributing to this equity;
- Your home has lost $75,000 in equity due, to its decline in value.
- This amount is $15,000 lower than the $60,000 you invested as a 20% payment.
- The $15,000 loss is partially compensated by the $8,625 increase in equity, from repaying your loan during the two years resulting in a remaining loan balance of $231,375 at the end of this period.
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