What Is Negative Equity?Article Category: Finance
With the world's economies struggling to pull their way out of recession, the media is full of discussion about house prices, home owners and negative equity. This article explains, in simple terms, what negative equity is and how it is worked out.
How is negative equity calculated?Negative equity can be calculated by taking the value of the asset at the current time and deducting the outstanding balance of the mortgage loan.
As an example, if an interest-only mortgage is taken out on a property at $200,000 and, during the term of the mortgage, the value of the property drops to $150,000, you end up with a $200,000 outstanding loan on a property worth $150,000. This means that you are $50,000 in negative equity.
A person holding negative equity is said to be "upside down".
Although negative equity usually occurs because of fluctuations in an asset's value and price, it can also occur with a fixed asset. As an example, if your loan payments are less than the interest charged each month, the loan balance will increase. This situation is referred to as negative amortization.
Written by Alastair Hazell
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