What is Negative Equity?

Secured loans are most often taken out of the equity of your home - that is, the home's value minus what you owe on it in terms of mortgages, etc.

The more equity you have, the more of a loan you can take, usually maxing out at the peak of your equity.


But with assets like houses, equity can change. It is not a static object, and when there is a housing crisis where a home's value drops due to lack of demand, that means that you equity has lowered.
When you take out a loan for your home's equity, but then after you have taken out that loan the value and equity of your home drops to below what the loan was for, this is known as "negative equity."

Understanding Negative Equity

The basic idea behind negative equity is that it means you owe - in a sense - even more than your loan on your house. It means that if you default on your secured loan and your home is repossessed and sold to pay back your debts, there is a good chance that your home will be sold for lower than the total amount of debts you have, meaning you still have outstanding debts even after your home has been sold.

This is especially troublesome and can cause not only strains on an individual's life, but it can also significantly impact the economy as the banks that have given all of these loans cannot even get the money they are owed from selling a home, resulting in the banks losing money as well as the individuals.

Negative equity is incredibly frightening. If you have negative equity, you need to make sure that you pay your bills, because the results of defaulting are far worse than if you defaulted with standard equity.

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