Understanding Negative Equity
A look at negative home equity from the homeowner's perspective
Negative home equity occurs when the amount of your home loan exceeds the dollar
amount your home is worth on the market. Loans are not set up in negative equity
situations, but there are a number of factors that can flip equity upside down.
Understanding how this happens can help you make smarter decisions when financing
your home. It can also help you understand your options for getting out from underneath
home equity that is currently upside down.
Negative equity and the loan-to-value ratio
Traditionally, when a buyer enters the housing market, he or she secures a loan
that is no more than 80% of the current value of the home being purchased. This
keeps the risk level of the lender manageable and the investment sound for the borrower.
A number of factors, including a fluctuating housing market and variable home loan
interest rates, can alter the loan-to-value ratio - even at times pushing it higher
than 100%. When this happens, the borrower is said to have negative equity in his
or her home.
Causes of negative home equity
Since banks are not willing to loan money that exceeds the value of the home it
is being used to purchase, you might be wondering how a homeowner could find himself
with negative equity. The causes of negative home equity can either be the result
of lending requirements that are too lenient or a change in the housing market.
- Buying a home during a market peak when prices are artificially high and then dramatically
- Borrowing against the home with a home equity
loan and then experiencing a decline in the market
- Securing a high-interest loan with minimal amounts applied towards loan principal
- Putting too minimal of a down payment on your home at the time of purchase
The effects of negative home equity
Negative home equity puts the homeowner in a predicament if he or she is looking
to sell. Prospective home buyers will only be able to secure a home loan for the
current value of the home on the market, not for the amount that is owed by the
lender. This limits the potential number of buyers for the property and can mean
the buyer is "trapped" in the home.
Negative equity options for the homeowner
A homeowner with an upside down mortgage has a handful of negative equity options
if he is looking to move forward.
- Sell and pay off the negative equity at the time of sale.
- Rent the property until market value increases or you pay the loan down to a point
where equity is positive
- Stay in your home and create a plan to make payments to reverse the negative equity
- Investigate the availability of "forgiveness" plans and negative equity refinancing
Negative equity refinancing
Securing a loan against negative equity can be difficult; however, if you are struggling
with negative home equity but still have a positive credit history you may have
During a drop in the housing market, the government may step up to provide negative
equity options to borrowers struggling to get back on their feet. These loans can
increase loan-to-value ratios above 100%. In other words, a borrower with a home
valued at $150,000 could potentially secure a loan that is greater than that amount
by a specific percent. Negative equity refinancing loans are typically offered at
low interest rates and are designed to help borrowers get back into a positive equity
situation in lieu of defaulting on their homes.
Start building your equity with Citizens Bank
Responsible lending choices can help you avoid falling into a negative equity situation.
Citizens Bank has fixed rate mortgage and adjustable rate
mortgage products available for a wide range of borrowers. To find out what your
home loan choices are, call to speak with a Citizens Bank home loan advisor at 1-800-340-LOAN
or request a rate quote today.