Negative equity occurs when the value of real estate falls below what is owed on the mortgage. It is calculated simply by taking the current market value of the property and subtracting the balance of the outstanding mortgage.
Negative equity is just the opposite of equity, which is the value of a homeowner’s interest in their home. In other words, equity is the portion of a home’s current value that the owner actually possesses free and clear. In a negative equity scenario, the owner possesses no value and may actually owe more back to the bank. Negative equity is often the result of purchasing a home right before the collapse of a housing bubble, or a recession or depression. Homeowners with negative equity – or homeowners that are “underwater” – often find it more difficult to pursue work in other areas or states due to the potential losses incurred from the sale of their homes. This is because, unlike a sale of a regular home, a sale for a home with negative equity becomes a debt to the seller. They are liable to pay their lending institution the difference in price between the attached mortgage and the sale price of the home.