How To Avoid Getting Stuck With Negative Home Equity

[Jan 12, 2009.]

 

What is Negative Home Equity?
Negative home equity is when the homeowner's property value is less that the sum of debts owed on the home. This negative equity in the home can become a serious issue for both the mortgage lender and existing homeowner. From the mortgage lender's perspective, negative home equity creates a serious liability for the existing loan. Homeowners on the other hand despise negative home equity because it diminishes their pride of home ownership and reduces their overall financial stability. Moreover, homeowners with negative equity may find themselves discouraged in making their monthly mortgage payments because of this predicament.

Borrowing Within Your Means
Homeowners who borrow excessively from their mortgage may soon find themselves trapped with negative equity. Although homeowners with a single mortgage are still at risk, those with second mortgages or additional home equity loans are often more susceptible. For homeowners with an additional second mortgage such as a home equity line of credit, it can be quite tempting to tap into the available credit in your home. As a precaution, homeowners with a a line of credit should consider other outside factors instead of just their available credit.

Address the Local Housing Market Trends
One of the most frustrating issues concerning negative home equity is that it's often out of the homeowner's control. When surrounding neighborhood homes drop in value, it's quite common for your home to diminish in value as well. In this current housing market, many of the steep price declines homeowners have been facing have been a result of rising foreclosures and various economic slowdowns.  As a result, before taking out an additional home equity loan, it's best to also analyze your surrounding neighborhood and community in addition to your own loan qualifications.

If You're Stuck With Negative Home Equity, What Can You Do?
Unfortunately, if you've taken all the necessary precautions and still find yourself dealing with negative home equity, the options are quite limited. First of all, make sure you don't aggravate the problem by borrowing even more money from your home. If you're stuck with negative home equity, be sure to keep a close eye on the value of your home. In this current market, the most feasible option will likely be a loan modification with the mortgage lender themselves. Because of the lack of equity, or negative equity, it will be hard to sell or refinance during this time.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.