Purchasing a home can be a smart investment, especially if its value increases over time. Ideally, you’ll walk away with more money when you sell the house than what you originally paid.

The difference between your home’s market value and what you still owe on your mortgage is called home equity. But what happens if your equity is low—or even negative? Let’s break it down.

How to Calculate Home Equity

Calculating home equity is simple:

Home’s Current Market Value – Mortgage Balance = Home Equity

• If the result is greater than zero, you have positive equity.

• If the result is less than zero, you have negative equity.

Negative equity is also known as being “underwater” on your mortgage, meaning you owe more on your home than it’s currently worth, according to the Consumer Financial Protection Bureau.

Common Causes of Negative Equity

1. Market Decline

One of the most common causes of negative equity is buying a home during a market peak. If prices later fall, your mortgage balance may exceed your home’s value.

2. Small Down Payment

The larger your down payment, the less likely you are to slip into negative equity. Putting little or nothing down at the time of purchase leaves you with minimal equity, making you vulnerable if property values decline.

3. High-Interest Loans

With a high-interest loan, a greater portion of your monthly payment goes toward interest instead of reducing your loan balance. Over time, this can slow down equity growth and leave you at risk if home prices fall.

4. Poor Home Condition

A property that isn’t maintained or updated can lose value. Deferred repairs and outdated features often drag down home equity, whereas regular upkeep helps protect it.

What to Do If You Have Low or Negative Equity

Finding yourself in negative equity can be stressful, but you do have options:

• Pay down your loan balance: Making extra payments directly toward principal helps build equity faster.

• Improve your home’s value: Renovations and repairs may boost your home’s market value.

• Refinance your mortgage: If eligible, refinancing through Freddie Mac could lower your interest rate and make payments more manageable.

• Sell to a cash buyer: If mortgage payments are overwhelming, selling quickly may be your best option.

At Enlight Homebuyers, we purchase houses in any condition, yes, even if you have little or no equity. You won’t need to make costly repairs or upgrades. Call us today at 801-939-0123 to see how we can help.

Frequently Asked Questions

Q: Can negative equity be fixed without selling my home?
A: Yes. By consistently paying down your mortgage and keeping up with maintenance, you can build equity over time. However, in a declining housing market, this process may take years.

Q: What happens if I need to sell but have negative equity?
A: Some homeowners qualify for a short sale, where the lender agrees to accept less than what is owed, as explained by HUD. Another solution is working with a cash buyer like Enlight Homebuyers to avoid foreclosure and financial strain.

Q: Is it risky to buy a home with a small down payment?
A: A small down payment increases the likelihood of negative equity if prices drop. A larger upfront investment gives you more financial security from the start.

Q: How do I know if I’m underwater on my mortgage?
A: You’ll need to compare your mortgage payoff amount with your home’s fair market value. Free online tools like Zillow’s Zestimate can give you an estimate, though a professional appraisal provides more accuracy.