Purchasing a home can be a great investment. Ideally, you as a homeowner will make money when the house increases in value through time. The goal is to get more money out of the home sale later on than what was originally paid. Knowing the difference between what is owed on the home and what it is now worth is called home equity.
We will go over everything you need to know about home equity and what it means when you have low or negative equity.
How to Calculate Home Equity
It is beneficial to know how to calculate a home’s equity. All you have to do is subtract what you owe on your home loan from what your home is worth. If that number is more than zero, you have positive equity. If that number dips below zero, you have negative equity. This is typically known as an underwater mortgage, which means that you owe more money on your home than it’s worth.
Even though negative equity isn’t always preventable, it is important to understand why it has happened and what solutions there are to help get you out of the situation quickly.
Causes of Negative Equity
Negative equity can happen because of several different factors. Some are in your control and some are not. Here are a few causes of negative equity to be aware of.
1. Market Decline
This is one of the most common reasons why homeowners may have a negative home equity. If you purchase a home when the market is at its peak, you may find that you owe more on your house than it’s worth later on if the market drops dramatically.
2. Small Down Payment
The more money you are able to put down on your home upfront, the better. If you take out a loan with no money down and the market drops soon after, you may already have negative equity. This is why it is so important to take some time saving up for a larger down payment before you decide to purchase a new home.
3. High-Interest Loans
If you have a high-interest rate on your loan, most of your monthly payments will end up going toward interest instead of paying down the loan. This can quickly cause you to have negative equity on your home if you’re not able to keep up on the high payments.
4. Home in Poor Condition
The condition of your home can affect its value. If it is rundown and old, its value will decline. If you are able, be sure to make any necessary repairs or updates and keep the home well-maintained. This will help avoid problems later down the road that can end up being very expensive.
What to Do When You Have Low or Negative Equity
You may be panicking if you have low equity in your home. What can you do if you’re caught in this situation? The best way to build your equity is to continually work on lowering your loan balance each month. Another way is to focus on increasing the value of your home by making repairs and updates. However, we do realize that this may not always be possible.
If you are struggling with your finances and keep falling behind on your monthly mortgage payments, you may want to sell your home fast to a cash buyer. At Enlight Homebuyers, we buy houses in any condition. That’s right! You can sell your home to us and we will buy it exactly as it is. Give us a call at 801-939-0123 or fill out the form below!