In the last year, we’ve seen the housing market soar to record highs. While this has been incredibly exciting for investors and sellers, some worried homeowners have wondered if we’re about to see a bubble burst. If you were in the market during the 2009 housing bubble burst, you might have worries about negative equity on your home.
Negative equity can be terrifying, especially if you think you might be trapped in your home. Read on to learn more about negative equity and whether you can sell your house with negative equity.
What Is Equity?
Before we dive into the question of what negative equity is, let’s talk some about equity itself. Equity is essentially the amount of value you own in a property, especially one you have a loan on. For instance, if you buy a home for $200,000 and put down a $40,000 deposit, you have $40,000 in equity right away.
Most of the time, equity in a house grows over time as the property appreciates and the market improves. You may make improvements to your home that increase its value. Or your house may appraise for more than you pay for it during your mortgage process, which gives you built-in equity.
What Is Negative Equity?
So now that we know a little more about equity and how it works, what is negative equity? Negative equity is when you owe more on a piece of property than that property is actually worth. In most cases, this term is used to describe homes with a larger mortgage balance than their market value.
As you might imagine, having negative equity on your home is a tremendously bad thing. When you owe more on your house than it’s worth, you can’t sell it without losing money. New buyers won’t be able to get a mortgage for more than the value of the home, so you’ll be stuck with the difference, as well as trying to pay closing costs for your new home.
How Negative Equity Happens
So if mortgage companies don’t give loans for more than the home value, how does negative equity happen? In most cases, this is the result of a housing market bubble burst or an economic recession. A house that people may have paid $300,000 for a few months earlier may suddenly be worth only $250,000 on the market.
It is also possible to wind up with negative equity as the result of property damage. Although this isn’t as common, you can wind up with negative equity if you have tenants who trash a property or a neighbor whose neglect is driving down your property values. This is also why home insurance is so important; if your house burns down, you don’t lose everything.
Negative Equity vs. Mortgage Equity Withdrawal
You may know that it’s possible to borrow money from the equity you have in your home to pay for certain things. For instance, if you have $20,000 equity in your home, you may borrow $10,000 of that to redo a bathroom. This is called a mortgage equity withdrawal, and it can be an excellent option for certain borrowing situations.
It’s important to note that it isn’t possible to wind up with negative equity in your home due to mortgage equity withdrawals. For one thing, your lender won’t give you money for the equity you don’t have. However, taking these loans can make it easier for you to wind up with negative equity if the market does drop.
You Won’t Lose Your Home
If you find yourself sitting on negative equity in your home, it can be easy to start panicking about if you’ll lose your home. After all, how can you continue owning a house when you’re upside down on your loan? But before you start packing and calling your bank, take a deep breath – you won’t lose your home.
As long as you can continue paying your monthly mortgage, you won’t be in danger of losing your home. Your lender can’t foreclose on your home unless you stop paying on your loan. You won’t be at risk of losing your home immediately, and you can figure out the best path for you moving forward.
Can You Sell with Negative Equity?
So what do you do if you have negative equity in your home and you need to sell it? It is possible to sell a house with negative equity, but you’re going to lose money on that deal. As we’ll discuss more in a moment, selling your home with negative equity should really only be a last resort.
When you sell a home you have negative equity in, you won’t be able to cover the remaining cost of your mortgage with the proceeds of the sale. You’ll have to pay the remainder of your mortgage, as well as any costs associated with selling your home. This can be a devastating financial blow for many people who count on their homes as an investment.
Stick It Out
If your income situation hasn’t changed since you lost equity in your home, one of the best things for you to do might be just to wait it out. In time, the market will recover and begin to grow again. The equity in your house should continue to grow again and will eventually surpass your mortgage value.
As scary as it can be, continue paying on your mortgage and, if possible, stay in your home. As we discussed, you won’t be foreclosed on as long as you keep making your monthly payments. And in the meantime, there are some things you can do to get your loan right side up again.
Pay Down Your Mortgage
In addition to waiting out housing market fluctuations, one of the best ways you can handle negative equity is to work on paying down your mortgage. Even paying your regular monthly payments will help reduce your loan amount, especially if you’re several years into the mortgage. Over time, this will help build equity in your house, so you don’t have to rely on its market value for equity.
If possible, it’s a good idea to pay a large chunk of money into your mortgage when your equity goes negative. Take a look at how much you would have to pay to get your loan right side up again, and consider whether you have any nonessential assets worth that amount. It might be worth selling your RV to improve your equity in your home.
Improve Your Home
Another great way to raise the amount of equity you have in your home is to improve your home. Upgrades and renovation projects can help increase the value of your home, no matter what the market is doing. Most of the time, this will take an up-front investment, but that might be worth it, especially if you’re handy.
A few projects are more likely to add value to your home without a substantial up-front investment. For example, putting loose-fill insulation in your attic can help you save on energy costs and improve the value of your home. Replacing your front door, putting up a stone veneer, and doing some minor kitchen or bathroom updates can also make a big difference.
Rent Your Property
If you have to move out of your home, but you don’t want to sell it with negative equity, one option is to rent your property out. Renters won’t need to know the home’s market value as long as it’s in good condition. You can keep your mortgage and make sure you get a lease that will cover your home costs.
If you plan to rent out your house, keep in mind that you will still be responsible for performing routine maintenance on it. This may include roof repairs, replacing HVAC units, hiring plumbers, and so on. If you aren’t going to be on-site to do this work yourself, plan to have a maintenance worker who you can call when these issues arise.
Take out a Loan
So what do you do if you have to move, don’t want to rent, and your mortgage is upside down? You may not have the money to pay off the extra that you now owe on your mortgage. One option in this situation is to take a loan to cover that amount of money.
Taking a loan to pay off another loan should be all but the last resort; Think very carefully about it before you decide to go this route. You need to make sure that you can actually afford to pay that loan off along with paying your new housing expenses. And it’s a good idea to look at the interest rates and terms of the new loan to see if your mortgage offers a better deal.
Refinance into Your New Home
In some cases, you may be able to sell your home without having to pay the outstanding amount on your loan. These situations are rare, but you might be able to refinance the remaining amount of your loan into your new mortgage. You’ll likely need to work with the same lender, and you’ll have to work out special arrangements with your mortgage company.
Before you decide to go this route, you need to make sure you can meet these new financial obligations. This will lower the home price you can afford since your loan will include the loss from your old mortgage. And you should be aware that you’ll start this loan upside down, too, since your new home value likely won’t exceed the amount of the mortgage you take.
When to Consider Selling
As much as you may not want to, there may be some situations where you just have to sell your home with negative equity and take the loss. This should be a last resort when you have no choice except foreclosure. In some instances, foreclosure may even be a better option than selling your home with negative equity.
In some rare cases, you may have reason to believe that property values in your area aren’t going to go back up. If that’s the case, you’re only going to lose money the longer you wait, even if you keep paying on your mortgage or doing home improvement projects. It’s better to sell sooner and cut your losses.
Avoiding Negative Equity
Of course, the best way to handle negative equity is to avoid getting into that situation in the first place. One of the best ways to do this is to ensure you don’t overextend yourself with your mortgage. Make sure your mortgage fits comfortably within your budget. Also, consider paying ahead so you can pay down that balance faster.
If you plan to take out home equity lines of credit, make sure you leave yourself some padding in your equity. Do what you can to improve your home value even if you aren’t in negative equity. And when possible, pay ahead on your mortgage to increase your equity in the home.
Learn More About Negative Equity
Negative equity can be terrifying, but it doesn’t have to be the end of your positive home prospects. If possible, wait out the housing market low and give your home’s value time to come back up.
If you’d like to learn more about negative equity in your home, check out the rest of our site at Dean Miller Real Estate.
We make Long Island real estate easy; Regardless of whether you are a first-time homebuyer or moving to a better home for you. Start the process of selling a home and achieve your homeownership goals today.