What is 'Negative Equity'

Negative equity is when the value of an asset falls below the outstanding balance on the loan used to purchase that asset. Negative equity is calculated simply by taking the value of the asset less the balance on the outstanding loan.

BREAKING DOWN 'Negative Equity'

Negative equity often occurs when a homeowner purchases a house using a mortgage and then the economy starts to slow or home prices start to drop. After the house purchase, the value of the home decreases below the value of the amount owed on the mortgage, causing negative equity.

RELATED TERMS
  1. Market Value Of Equity

    The total dollar market value of all of a company's outstanding ...
  2. Deferred Interest Mortgage

    A mortgage loan that allows the borrower to make minimum payments ...
  3. Asset Value Per Share

    The total value of a fund's investments divided by its number ...
  4. Home Equity

    The value of ownership built up in a home or property that represents ...
  5. High Ratio Loan

    A loan of any type for which a relatively small down payment ...
  6. Mortgage Equity Withdrawal - MEW

    The removal of equity from the value of a home through the use ...
Related Articles
  1. Personal Finance

    The Smartest Way to Tap Your Home Equity

    Using your home as a source of funds can be a smart choice in some situations. Just be sure to run the numbers carefully.
  2. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  3. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  4. Personal Finance

    Mortgage Options for Underwater Homeowners

    Find out what options are available when your mortgage is greater than the value of your home.
  5. Investing

    What is Equity?

    Think of equity as ownership in any asset after all debts stemming from that asset are paid.
  6. Personal Finance

    Reverse Mortgage Pros and Cons

    It's a way to use your home equity for help when you're older. But does it make sense for your family? Here's how to tell and how to protect your spouse.
  7. Retirement

    Reverse Mortgage Or Home-Equity Loan?

    If you have equity in your home and need more cash in retirement, a reverse mortgage – or home-equity loan or line of credit – is an obvious option.
  8. Personal Finance

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  9. Personal Finance

    7 Mortgage Trends To Expect In 2011

    How will the year compare to 2010? What's likely to be different?
  10. Personal Finance

    Mortgage vs. Home-Equity Loan: How They Differ

    Mortgages and home-equity loans both use the borrower's home value as collateral.
RELATED FAQS
  1. What is the difference between market capitalization and equity?

    Understand the difference between market capitalization and equity, two primary measurements used to evaluate the worth of ... Read Answer >>
  2. What are the Differences Between a Home Equity Line of Credit (HELOC) and a Home ...

    Learn the differences between a home equity loan and a home equity line of credit, and find out how to select the one that ... Read Answer >>
  3. Is a home equity loan a good way to pay off my credit card debt?

    Learn about the characteristics of a home equity loan and how it can be used to help you pay off your outstanding credit ... Read Answer >>
  4. How do I calculate how much home equity I have?

    Find out how to calculate the home equity in your home, your home equity percentage and the loan-to-value, or LTV, based ... Read Answer >>
  5. Is the interest on a home equity line of credit (HELOC) tax deductible?

    Learn the advantages of using a home equity line of credit, and find out how these low-rate loans also qualify for a tax ... Read Answer >>
  6. Does the balance sheet always balance?

    Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities ... Read Answer >>
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  5. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  6. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
Trading Center