Negative equity is a term that is often heard in the media when discussing houses and mortgage payments. It is generally used to describe when someone has a house that they owe more money on than it’s worth.
However, this can also be the case with cars or homes. While negative equity isn’t always such a bad thing, it can cause problems if you need to sell your home or car quickly and find that you’re unable to do so without taking out further borrowing from another lender (or selling up for less than what’s owed).
This article will explain what exactly equates to being in a negative equity position, some of the situations where one might end up here, and how best to handle those situations.
What Is Negative Equity?
Negative equity is a situation where your mortgage is greater than the value of your home. This means that you owe more on the house than it’s worth in the market.
It occurs when the market value of your home drops below what you owe on it. For example, if you bought a home for $200,000 and had to take out a $160,000 mortgage loan at 7% interest rate over 30 years when you purchased it, and now that property is only worth $150,000 then there will be $10,000 negative equity in this scenario.
In other words: Negative Equity = (Market Value – Mortgage Balance).
Different Types of Negative Equity Situations
When it comes to negative equity, many people are confused about what exactly it is. Negative equity is when you owe more on your loan than the house is worth. Negative equity can happen for a number of reasons, including:
- Rising interest rates
- An unexpected decline in property values
- Heavy renovations or improvements that add more to the value of your home than originally planned
How Much Negative Equity Will A Bank Finance?
If you have negative equity, your lender may not be willing to finance the new car. If you’re financing through a private lender or dealership, they may require that the difference between what your old car is worth and what it owes be paid off in cash.
The lender might also offer to refinance into another loan for the difference between your old car’s value and what still needs paying off on it.
The amount of negative equity that a bank will finance depends on several factors:
- Your credit score
- How much cash you can put down
- What kind of vehicle you want (new or used)
How To Get Out Of Negative Equity?
Getting out of negative equity is not an easy task for most people, especially if you have a lot of debt. While there are many options you can explore to get out of this situation, it’s important to consider them carefully before making any decisions.
Here are some options to consider:
Sell your house or rent it out. If your home has gone up in value since you bought it, selling the property could be a good option for paying off your loan and getting back into positive equity.
However, this will depend on how much the value has gone up since purchase and whether or not buyers are interested in buying homes right now (this can vary depending on where you live). If selling isn’t an option, renting out rooms in your house could help with covering expenses. While also generating income without having to move somewhere else entirely (which may be expensive).
Trade in/sell/pawn off belongings that aren’t essential for living comfortably. And replace them with cheaper versions until things improve financially again (this may involve selling old cars).
This won’t earn much money but should help balance things out somewhat. At least temporarily until something more substantial happens. Like finding another job or receiving enough overtime paychecks. So that extra payments can be made toward existing debts every month instead just once every couple months when they’re due.
How To Trade In A Car With Negative Equity?
In order to trade in a car with negative equity, you must first determine the value of your trade-in and new car. You can do this by checking their Kelley Blue Book values online.
Once you have these figures, subtract the difference between them from the amount owed on your old vehicle and take that number to your dealer for an estimate of how much they will offer for it in trade. If necessary, use this information to get a better deal on your new vehicle from them as well.
How To Get Out Of Negative Equity Situations?
If you find yourself in a negative equity situation, the best way to get out of it is by paying down your mortgage as soon as possible. The longer you stay in negative equity, the more difficult it will be for you to sell your house at a price that covers both your mortgage and all closing costs associated with selling your home.
You can also use other strategies to help move yourself back into positive equity territory:
- Refinance Your Loan – If refinancing is an option for you, this is an excellent way to reduce monthly payments on a loan or consolidate multiple loans into one manageable payment plan.
- Sell Your Home – Selling the home may seem like an obvious solution. But sometimes people get stuck in homes they can’t sell. Due to being upside down on their purchase price versus what they owe on their mortgage loan (i.e., “underwater”).
Negative Equity Doesn’t Necessarily Have To Be A Bad Thing, Unless Trying To Sell Your House
Negative equity, or being underwater on your mortgage, can be a big problem. However, it doesn’t always have to be. As long as you’re not trying to sell your house and make a profit, negative equity isn’t necessarily a bad thing.
It just means that you’ll have to pay the difference between what you owe and what the house is worth if you want to move. If this seems unfair, consider this: would it really feel better for someone who has no debt?
It’s also important to remember that negative equity is not necessarily permanent. Your home’s value may increase over time and bring its price above what you owe on your mortgage. So that one day soon (or later) when you decide or need to sell your house again, everything balances out once more.
Negative equity can add to your already high mortgage payments and create a lot of financial stress. It’s important to pay down this debt while it’s still manageable. So that you’re not stuck in a situation where you owe more than the house is worth. So it’s a good idea to get professional advice from a specialist, who’ll be able to help you put a plan in place to tackle your negative equity.