Negative equity, or being "underwater," occurs when liabilities (debt) exceed assets, indicating that an asset (like a home/car) is worth less than the loan balance, or a company has accumulated losses. This signals financial distress, potentially making it impossible to sell without paying the difference, limiting refinancing, or indicating insolvency.
Jan 30, 2025. 5-minute read. Negative equity means you owe more on your loan than the current value of your asset. The term is also commonly applied to cars. But it's particularly distressing when applied to your home.
Negative equity occurs when your home's value sinks below the amount you owe on it (from your mortgage or other home loans). Having negative equity can make it difficult to sell or refinance your home.
Negative equity occurs when liabilities exceed assets, often signaling financial distress. While it's not ideal, it can be acceptable in specific scenarios, such as during the early stages of a startup or when a company is investing heavily in growth.
Negative equity options for the homeowner
You can get rid of negative equity by making additional payments, refinancing or waiting it out. Having negative equity, also known as being underwater, is when you owe more on your mortgage or auto loan than your home is currently worth.
By far the simplest option for selling a home with negative equity is to get as much as possible from your home sale and pay the remaining mortgage yourself. If you owe $200,000 on your home loan and sell your house for $175,000, you can pay the remaining $25,000 at the time of closing.
The amount of negative equity you can roll over depends on your credit, the estimated value of the vehicle you're purchasing, and the policies of your lender. Most lenders will finance up to 120% to 130% of the car's value, which includes the vehicle price, taxes, fees, and any negative equity.
To get out of negative equity (being "upside-down") on a car, you can pay down the principal faster with extra payments, refinance for a better rate or term, sell the car privately for more than trade-in, or strategically handle it when buying a new car, potentially by leasing or rolling the equity into a new loan if necessary, while always aiming to stop the cycle with future purchases.
Leases are short-term (like 24 months), meaning you won't be stuck in long-term debt. At the end of the lease, your negative equity is gone, and you're free to move on.
If it's negative, you're underwater. For example, if your car is worth $15,000 but you owe $18,000, you're $3,000 underwater. This means you'd need an extra $3,000 to break even if you sold it today. The Consumer Financial Protection Bureau found that those with negative equity had bigger loans.
What to do if you have negative equity
Impact on Credit Scores
Continuous negative equity, especially if it leads to difficulties in making timely loan payments, can negatively impact your credit score. A lower credit score can: Increase interest rates on future loans. Make it challenging to secure credit for other purchases, like a home.
Starbucks does have a negative equity value from a book value perspective because of its past share buy backs but should not alarm investors, for those looking at why its debt/equity value appears as a negative number.
Signs You Might Have Negative Equity
If the trade-in vehicle has $4,000 of negative equity, the dealer will pay off that loan and roll the same amount into the loan for the new vehicle. That will increase your monthly payment, and you may be able to extend the length of the new loan to make the payment more affordable.
Dealing with Negative Equity
Wait to buy another car until you have positive equity in the one you're still paying for. For example, consider paying down your loan faster by making additional, principal-only payments. Sell your car yourself. You might get more for it than what a dealer says it's worth.
To get rid of a $20k negative equity car, you can sell it privately (best value), pay down the loan faster, refinance for better terms, or trade it in by paying the difference or rolling it into a new, less expensive car (use caution with rollover). Options like voluntary repossession or letting it get repossessed are damaging, while leasing might offer an escape route at term end.
For years, dealerships have been using a tactic called a “four square”—a sheet of paper divided into four boxes where the salesperson will write down your trade value, the purchase price of the vehicle you're buying, your down payment, and your monthly payment.
Refinancing might allow you to secure a lower interest rate or shorter term, reducing the overall cost of the loan. However, refinancing won't eliminate negative equity; it just makes the loan more manageable.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.