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If the value of your property falls below the amount of money left on your mortgage, then you’re in negative equity. You have several options to move forward, but they all have consequences.
Negative equity, or an underwater mortgage, is when you owe more on a home than it’s worth.
For example, let’s say you took out a mortgage for $450,000. A year later, the market value of the property has fallen to $400,000. If you still owe $430,000 on your mortgage, you have negative equity. If you elect to sell the property now, you’ll still have $30,000 remaining on the mortgage that you’ll need to pay off.
If you have negative equity in your home but you need to sell it, you still need to repay the full mortgage. This leaves you with four main options:
In most cases, you’ll be better off keeping the property and waiting to sell until you’ve broken even or built up equity. You can keep paying the mortgage down, work with a lender to find out if you’re eligible to refinance to a lower interest rate or rent the property out and use the rental income to pay down the mortgage.
But in some cases, keeping the property might not be worth it. If the home needs a lot of work or repairs that you can’t afford, you may be better off taking the loss — especially if the home’s condition is gradually getting worse.
Explore all of your options and talk to your lender, a real estate agent and/or a CPA before deciding what to do about your underwater mortgage.
Negative equity can be caused by a number of factors, including:
You may be able to turn things around if you:
If you have negative equity in your home, start by considering whether you might be better off waiting to sell. If you need to move out, talk with a financial professional to help you make the best decision.
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