|By Sybria White on December 2, 2010
Negative Equity occurs “when the value of an asset falls below the outstanding balance on the loan used to purchase that asset”1. Negative equity is also commonly referred to as being “underwater” or “upside down”2.A common example of an instance of negative equity occurred recently when the housing bubble burst. Homeowners who purchased a house using a mortgage experienced negative equity when house prices started drop dramatically. Unfortunately, negative equity will cause you to pay considerably more than what you paid to purchase your home. This makes selling your home very difficult. Negative equity will ensure that you will receive less money back than you paid out. In some cases those selling their home with negative equity end up owing the bank thousands of dollars3. Because no one is absolute certain what the housing economy will do over extended periods of time, it is rather difficult to predict if one will face negative home equity. However the following helpful tips will help you avoid the effects of negative equity.
Helpful Tip #1
When looking to purchase a home, keep in mind the value of the home you have your eye on in relation to surrounding homes. If the home has a relatively good value for its area, chances are you will be less likely to face negative equity if house prices dip lower.
Helpful Tip #2
When it is time to purchase your home, make sure that you put forth a considerable down payment. This will ensure that you have an equity safety net if house prices start to drop. If they drop a little and you put down a hefty down payment you will have enough wiggle room to avoid the negative equity trap.
Helpful Hint #3
Choose a traditional fixed-rate or adjustable-rate mortgage and pay down your mortgage as soon as possible so your equity can grow as time progresses. These mortgages allow you to build equity with each monthly mortgage payment.
These are just a few helpful tips that will help those looking to avoid home negative equity. In these difficult times, we as consumers have to take extra to ensure financial security.
Also see: Equity Stripping is Risky Business