Negative Equity: What Every Home Owner Needs to Know

Home Ownership and Negative Equity

Not all home ownership is created equal, and when it comes to buying a home or taking out a home equity line of credit you need to be careful, lest you fall victim to negative equity. If you don’t know if negative equity is something you need to worry about or you’re not even sure what it is, there are some things you need to know.

The Changing Face

Home ownership has certainly changed in recent decades. It used to be that you would need a 20% down payment in order to purchase a home. Nowadays, it is possible to buy a home with little or no money down.

The new standard for a down payment has gotten to be about 5%. That’s quite a difference from the 20% of yesteryear. It’s important to realize that even though this can open up the opportunity of home ownership for more people, it can also result in a lot of problems.

Negative Equity

Negative equity is one of the common problems caused by not putting enough of a down payment on your home or taking out the wrong type of mortgage. Although banks will only give you a home equity loan equal to the approximate equity in your house at the time you open up a home equity line of credit, you could end up in the negative if the housing market takes a dip downward.

Think your home won’t decrease in value? You may want to think twice. In recent years, the housing market has dropped and homeowners aren’t able to get as much money for their properties as they once could.

A negative equity situation will not hurt if you are not planning to sell your house any time soon. Most negative equity situations resolve themselves over the course of time. The reasoning is that the housing market will eventually increase and your mortgage and home equity loans will decrease.

With that being said, however, remember that it is never wise to go into a negative equity situation knowingly and do what you can to keep your home equity at a healthy level.

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