Negative equity can be a scary proposition for anyone looking to purchase a home or refinance an existing mortgage. But what is negative equity, exactly? In short, it’s when the value of your house drops below the amount you owe on your mortgage loan. This can have serious consequences if you’re trying to move or refinance, so it’s important to understand how to avoid getting into this situation. Let’s take a deeper look at what negative equity means and how you can protect yourself from it.
What is Negative Equity?
Negative equity usually occurs when a homeowner has taken out a loan for an amount greater than their home’s current market value. This means that even if they sell their home, they would still owe money on the loan after subtracting the sale price from the loan amount. Due to this discrepancy between the loan amount and the sale price, homeowners are unable to access any additional cash from selling their homes and their debt remains unpaid.
How Can You Avoid Negative Equity?
The best way to avoid negative equity is by making sure that your down payment is sufficient enough to cover any potential losses due to changes in market values over time. Try to put down at least 20%, but more if possible. Additionally, try not to stretch yourself too thin when it comes to monthly payments—aim for something around 28% of your gross income as an upper limit on housing costs (including taxes and insurance). Finally, watch out for predatory lenders who may try and convince you into taking on more debt than you can handle; make sure that any lender you work with has your best interests in mind before signing anything! Additionally, make sure that you are aware of current market values in your area so that you don’t end up paying more than necessary for your property.
Another way to avoid negative equity is by making extra payments on your mortgage whenever possible. If you have some extra cash available each month, put it towards paying off part of your principal balance instead of increasing your monthly payment amount; this will help reduce the total amount owed on the loan more quickly and will also reduce overall interest costs over time. Additionally, try setting up automatic payments for yourself each month so that you don’t forget or miss payments due date; this will help ensure that all payments are made on time and in full every month without having to remember dates or manually enter information into online payment portals each month.
Understanding what negative equity is and how it can be avoided is essential knowledge for anyone considering purchasing or refinancing a home. By doing research ahead of time and making extra payments whenever possible, homeowners can ensure that they do not end up owing more than their home’s current market value in case they need to sell at any point down the line. With careful planning and diligent research beforehand, homeowners can avoid falling into negative equity scenarios altogether!