Negative equity on mortgages explained: What homeowners need to know

Finding out you owe more on your home than it’s currently worth can feel like a financial gut punch. This situation — called negative equity — happens when your property’s market value dips below your outstanding loan balance. Whether it’s due to falling property values, unfortunate timing, or something else, negative equity can put serious pressure on your financial freedom and future plans.

Are you “upside down” on your mortgage? Negative equity might be your current reality, but it doesn’t have to define your long-term homeownership story. In this guide, we’ll explain what happens if you have a negative equity mortgage, explore how your loan got underwater, and provide practical ways to rebuild your home’s value and turn your equity positive.

What is negative equity?

Equity is the amount of your home that you actually own. It’s the difference between your property’s market value and what you still owe on your loan. When you have positive equity, your home is worth more than your outstanding balance.

But what does negative equity mean? You have negative equity when the balance you owe on your loan is more than your property’s current market value.

For example, imagine you owe $300,000 on your mortgage, but your home’s market value has dropped to $270,000. That means you have $30,000 in negative equity. This position limits your ability to sell without paying extra out-of-pocket, refinance with better terms, or tap into your home equity for projects like home renovations.

So, is negative equity bad? It’s not ideal, but there are ways to get your home value back on track. The first step is figuring out where you stand financially and developing a strategy that works for your financial situation.

How to calculate negative equity

You can calculate equity with the same simple formula, whether it’s positive or negative. Simply subtract your outstanding loan balance from your home’s current market value. If the amount is negative, you have negative equity.

Follow these steps to calculate your equity:

1. Determine your home’s market value. You can check online estimators, look over recent sales of similar homes in your area, or get a professional appraisal for the most accurate numbers (although this can cost several hundred dollars).

2. Check your mortgage balance. Log in to your lender’s portal or review your most recent statement to see how much you still owe on your loan.

3. Calculate the result. It’s easy: Market Value – Mortgage Balance = Equity.

So, what happens if your house value goes down? Home value depreciation is a common cause of negative equity.

Let’s say you bought a home for $350,000 and made a 10% down payment of $35,000. That leaves you with a $315,000 mortgage. After making payments for two years, your loan balance is down to $300,000. Then, a housing market crash hits your area, and similar homes now sell for just $285,000. Using the formula:

Market Value – Mortgage Balance = $285,000 – $300,000 = –$15,000

That negative amount means you have $15,000 in negative equity. Your home is worth less than you owe.

What causes negative equity?

Negative equity doesn’t happen overnight. It typically comes from a combination of factors — like market conditions, financing decisions, and payment history — that slowly shift the balance between your loan and your property’s value. Here are some of the main culprits.

Buying too high

Buying during a real estate boom can create the conditions for negative equity. If you borrow a significant loan to purchase at peak prices, your equity may be vulnerable when markets cool down.

A small down payment

Financing options with small down payments don’t provide a cushion to handle market ups and downs. When you start with a small amount of equity, even minor dips in property values can push you underwater. This is extra risky with loans that have higher interest rates or less favorable terms.

Falling behind

Missed mortgage payments can also lead to negative equity. When you skip payments, your lender may add late fees and penalties to your balance while interest piles up on unpaid amounts. In the meantime, your home’s value isn’t keeping pace, especially when the market is flat or declining. Even if you start with positive equity, missed payments can tip the scales until you find yourself in the red.

How to deal with negative equity

Negative equity doesn’t have to last forever. There are strategies you can use to rebuild your financial position and eventually get your head back above water.

Make payments consistently

The simplest way to reduce negative equity is to make mortgage payments on time. Each payment reduces your loan balance while giving the market time to recover. If you have the funds, consider making extra payments directly toward your principal debt.

Home improvements

If you’re really keen to sell your home ASAP, strategic home improvements can increase your property’s market value and help offset negative equity. Focus on upgrades with a high return on investment, such as kitchen refreshes, bathroom upgrades, or boosted curb appeal. Even simple projects, like fresh paint or new fixtures, can make a big difference in what buyers are willing to pay for your home. However, renovations can put you under significant financial strain, so this may not be the ideal solution.

At the very least, maintain your property well. A home falling into disrepair quickly loses value, lowering your negative equity even further.

Refinance your mortgage

Refinancing your loan can lower your monthly payments, lower your interest rate, or change loan terms to make debt more manageable. Refinancing with negative equity used to be very difficult, but today’s lenders provide more options. Programs like Federal Housing Administration (FHA) loans may not deny refinancing loans even when the homeowner owes more than their property is worth.

Better offers affordable refinancing options for everyone, even homeowners in challenging equity situations. Explore your options and apply for refinancing in just three minutes.

Wait out the market

Real estate markets recover over time. If you bought at peak prices just before a market correction, patience is your friend. While you wait it out, focus on making regular payments to reduce your loan balance, and consider combining approaches like refinancing and home improvements to get your equity back on track.

Earn extra income from your property

If your budget is tight and negative equity is causing financial strain, consider renting out a spare bedroom, converting a basement into a rental unit, or even listing space on short-term rental sites for extra cash you can apply to your mortgage balance.

However, keep in mind the hidden costs of renting out your home. Landlords pay higher premiums for homeowners insurance, and taxes take a portion of their earnings. Don’t expect to pocket the full amount you charge for rent.

Beat negative equity with Better

Negative equity doesn’t have to be a permanent financial roadblock. Whether you wait out the market, make smart home improvements, or rent out spare space, you can rebuild your equity and strengthen your financial foundation.

Better makes escaping negative equity easier with refinancing options designed for today’s homeowners. Even if you’re underwater on your mortgage, Better’s refinancing specialists can help you find a path forward that traditional lenders might miss.

Check your refinancing eligibility and terms options in just three minutes and start making your way out of negative equity. Click here to get started.