What is Negative Equity?
Home equity is how much of your home’s value you actually own versus the amount that is financed. Your equity changes all the time as your home’s value fluctuates, and as you pay down your loan. If your home’s value drops below your outstanding loan balance, you have negative equity.
Calculate Your Equity
To calculate positive or negative equity, you first determine your home’s value, then calculate your loan balance. The difference between home value and loan balance is your positive or negative equity. Zillow can give you an initial estimate of your home’s value, then you can find a local real estate agent to do a custom analysis for you. Most local real estate agents are happy to do this kind of analysis for free. Next you can look at your mortgage statement to get your current loan balance. Or you can do your own loan pay-down calculations using your specific loan amount and rate.
A Look at Two Scenarios
Let’s look at two scenarios to clearly illustrate the math behind positive equity and negative equity. At the time of a purchase, your positive equity is the amount of your down payment. If you bought a home for $300,000 using a 20-percent down payment of $60,000 and a 30-year fixed rate mortgage at 4 percent, you’d have 20-percent equity in your new home. If your home’s value rose to $325,000 over the first two years, you’d have 28.8-percent positive equity in the amount of $93,625. There are three components of this positive equity:
- $25,000 is equity gained from your home appreciating in value,
- $60,000 is equity from your 20-percent down payment, and
- $8,625 is equity earned from paying your loan down (simply by making your normal mortgage payments), making your loan balance $231,375 at this two-year mark.
Conversely, if a recession or other macroeconomic factor caused your home’s value to drop to $225,000 over the first two years, you’d have 2.8-percent negative equity in the amount of (negative) $6,375. There are three components of this negative equity:
- $75,000 is equity lost from your home declining in value,
- This is $15,000 less than the initial $60,000 that you put in as your 20-percent down payment, and
- The $15,000 loss is offset by $8,625 in equity earned from paying your loan down in the first two years, making your loan balance $231,375 at this two-year mark.