Recently there have been concerns of negative equity becoming a significant factor in creating yet another housing market bubble. In recent months, there have been risks associated with the price falls, including the rise of negative equity, which all stems from dwelling values in the housing market. If you are a potential first time home buyer, then you will want to keep an eye on the market to ensure you avoid the pitfall of negative equity.
What is Negative Equity?
To understand the concept of negative equity, we must first understand “positive equity,” or as we typically refer to it, home equity.
Home equity is the property’s current market value, minus any liens or encumbrances that lessen the property value. If you purchase a home with a mortgage, the lender has interest in the property until the loan is paid off. A home’s equity will change over time as you make payments on the mortgage, and market forces affect the value. In simple terms, it’s the portion of the home’s current value that the owner possesses free and clear.
On the flip side, negative equity is loan debt that exceeds the value of a home. Negative equity is what homeowners commonly refer to as being “underwater.”
What Causes Negative Equity?
Negative equity typically occurs when the value of real estate property falls below the balance or value on the mortgage that is used to purchase that same property. Another factor that causes negative equity is buying a home during a time where the market prices are artificially high and then drop dramatically. Lastly, it can occur if you put too small of a down payment on your house when you purchase it.
Looking on the Bright Side
Fortunately, a drop in the market value does not necessarily mean that the market is in trouble. In recent years, a drop in the market has been in response to a spike. If you’ve purchased a home and have negative equity, you may be able to refinance. Banks are not as likely to dish out loans against negative equity, but it can be possible. Negative equity loans are designed to help individuals back on their feet; therefore, these loans are typically offered at low interest rates.
First Choice Mortgage is Here to Help!
If you are a first time home buyer and are struggling with negative equity or other mortgage issues, First Choice Mortgage is here to help. Make your mortgage less stressful and contact us today!