Can You Borrow Against a Negative Home Equity?

by Don Rafner

You need money to help pay for your daughter's college tuition. Or maybe you need a large dose of cash to cover the costs of a long-planned vacation or to pay off your high-interest credit cards. You'd like to do this by tapping your home through a home equity loan or a home equity line of credit. Problem is, your home has negative equity, meaning that you owe more on your mortgage loan than the value of your home. If you're in this situation, borrowing against your home's equity is an impossibility.

Borrowing Against Your Home's Equity

Homeowners who want quick access to a significant amount of money can always turn to their home's equity. They can choose from two products: a home equity loan that is a second mortgage or a home equity line of credit that acts as a credit card with a balance determined by the amount of equity in a residence. But to access either product, homeowners must have equity.

Calculating Equity

Calculating equity is fairly simple. Homeowners who purchased a $200,000 house while putting down a down payment of 10 percent -- or $20,000 -- owe $180,000 on their residence. This means that they have equity of $20,000, the amount of their mortgage loan that they have already paid off. Equity changes over time as homeowners pay down more of their mortgage loan's principal balance and as home prices rise or fall. Say that the same homeowners above, five years later, have paid off $10,000 more in principal. If their home value has stayed the same, they would now have $30,000 worth of equity and owe $170,000 on their mortgage loan's principal balance. If their home's value has changed, however, their equity will also change. If their home now carries an appraised value of $250,000, they'd now have equity of $80,000, the difference between the $250,000 their home is worth and the $170,000 they owe on it.

How Much You Can Borrow

The amount of equity in owners' homes determines how much money they can borrow with a home equity loan or home equity line of credit. Homeowners who have $50,000 worth of equity can theoretically borrow up to $50,000 through either of these vehicles. However, most mortgage lenders will only lend owners an amount that is lower than their actual equity.

Negative Equity

Homeowners can run into trouble, though, if their residences have lost value since they purchased them. If their home value has fallen by enough, they may be underwater, or have negative equity. This happens when homeowners owe more on their mortgage loans than what their homes are currently worth. Homeowners in such a situation can't borrow against their home's equity because they have no equity.

About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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