Negative Equity Overview

November 3, 2021 Nick Nahid

Your home equity is the difference between what you own and how much you owe. As your home's values fluctuate and you pay down your loan, your equity will change. Negative equity is when your home's worth drops below the outstanding loan balance.

Calculate Your Equity

First, determine the value of your home and then calculate your loan balance to calculate your equity. Your positive or negative equity is the difference between your home's value and your loan balance. Zillow will give you an initial estimate of the value of your home. Then, you can search for a local agent to complete a customized analysis. This type of analysis is usually free and available from most local real estate agents. To see your current loan balance, you can also look at your mortgage statement. Finally, you can perform your own loan payment-down calculations based on your loan amount and rate.

A Look At Two Scenarios

Let's take a look at two examples to illustrate the math behind negative equity and positive equity. First, your down payment is your positive equity. You would have 20% equity in your home if you purchased a $300,000.00 home with a 20% down payment of $60,000 and a 30-year fixed-rate mortgage at 4.5%. Second, you would have 28.8 percent equity if your home's worth rose to $325,000 in the first two years. This amount is $93,625. This positive equity has three components:

$25,000 equity is the value of your home increasing in value.
Equity equals $60,000 minus your 20% down payment.
$8,625 equity is earned by paying down your loan (simply making regular mortgage payments), making the loan balance at $231,375 after two years.

If your home's market value drops to $225,000 due to a recession or another macroeconomic factor, then you would have negative equity of 2.8 percent in the form of $6,375. This negative equity has three components:

$75,000 equity loss from your home's declining value
This $15,000 is less than the $60,000 you initially put down as your 20% down payment.
This $15,000 loss can be offset by $8.625 equity from the first two years of paying down your loan. Your loan balance is now $231,375.

Calculate Your Equity

A Look At Two Scenarios

$25,000 equity is the value of your home increasing in value.

Equity equals $60,000 minus your 20% down payment.

$8,625 equity is earned by paying down your loan (simply making regular mortgage payments), making the loan balance at $231,375 after two years.

If your home's market value drops to $225,000 due to a recession or another macroeconomic factor, then you would have negative equity of 2.8 percent in the form of $6,375. This negative equity has three components:

$75,000 equity loss from your home's declining value

This $15,000 is less than the $60,000 you initially put down as your 20% down payment.

This $15,000 loss can be offset by $8.625 equity from the first two years of paying down your loan. Your loan balance is now $231,375.