What is negative equity and can you avoid it?

Equity is the portion of an asset— such as a home or car — that you own outright. Conversely, negative equity means you owe more on the asset than it’s worth, so you wouldn’t be able to sell it for a profit. This often happens when the value of the asset drops below the outstanding balance of the loan financing it (aka being “underwater”).

How do you calculate negative equity?

Negative and positive equity are calculated the same way: Subtract your remaining loan balance from your property value or the value of the car. If the result is negative, you owe more on your home or car than it’s worth.

Let’s say you bought a home worth $300,000 and took out a $285,000 loan. A year later, your local real estate market has experienced a downturn. Homes selling for less than they were before has had a detrimental effect on your property value.

Your home is now worth $270,000 instead of the $300,000 you originally paid, and you owe your lender a little more than $281,000 after making a year’s worth of payments on your 30-year term. In this scenario, you would have around $11,000 in negative equity because you owe your lender about $11,000 more than your home is worth.

In Q4 2025, 3% of homes in the U.S. had negative equity. Meanwhile, cars tend to incur negative equity more quickly than homes since they depreciate over time instead of appreciating like most real estate. According to Kelley Blue Book, new cars lose about 55% of their original purchase price within the first 5 years.

What can cause negative equity in a home?

There are two main reasons that a home may have negative equity.

First, a change in the housing market could cause the home’s value to drop below your outstanding mortgage balance. You may be particularly susceptible to this if you financed the home with a loan that requires a low down payment or none at all (such as VA or USDA loans). Second, a mortgage that is modified with a higher interest rate or extended loan term (often due to missed payments) may increase the loan balance beyond your equity.

Negative equity can cause several problems for homeowners, including difficulty refinancing to take advantage of more favorable terms. Lenders can’t loan more than the home is worth. Depending on your current mortgage, you may have an option to refinance, but this isn’t always the case.

You may also find it challenging to move. When you sell your home, you typically use the sale proceeds to pay off your existing mortgage. If there’s an outstanding balance after the sale, you would need to pay off the difference with cash. If you show a hardship, your servicer may approve a short sale. But you should know this has a negative impact on your credit.

What can you do to reverse negative equity?

Fortunately, there are a few things you can do to reverse negative equity:

Continue making payments

Every time you make a mortgage payment, you lower your mortgage balance. Eventually, this can help you get back on the right side of the equity equation. If you can afford it, consider making extra payments on the loan to bring your total loan balance down faster. When home values rise again, you can eventually sell or refinance your home.

Make home improvements

Making permanent home improvements can increase the value of your property, which may help you turn the tables when facing negative equity. These improvements should be both meant to last and tangible in nature. Changes to the aesthetics of your home – like painting – or temporary installations won’t impact your property value.

Some examples of improvements that can increase a home’s value include:

• Replacing large appliances with newer models
• Adding a home security system
• Replacing old, worn-out cabinets and fixtures in the kitchen
• Updating your bathroom; the kitchen and bathroom are two areas that prospective home buyers pay a lot of attention to, so upgrades here can really pay off
• Installing a patio or deck in your backyard

Refinance your loan

When you refinance a mortgage, you do so to secure more favorable terms or turn existing equity into cash. While you can’t cash out equity you don’t have, a change in your rate or term could provide payment relief.

Most refinancing options require some amount of existing equity (typically 20%), making a refinance once you have negative equity difficult, if not impossible. However, an FHA or VA Streamline – also known as a VA Interest Rate Reduction Refinance Loan (IRRRL) – allow you to refinance regardless of property value in many instances.

Not only is there the potential for a lower rate and payment, but there are also lower mortgage insurance and funding fee requirements. However, you must have an FHA or VA loan to qualify.

Also, keep in mind that if you see the market turning and realize your property value is dropping, it’s better to refinance early than wait until it might be too late.

The bottom line: Negative equity can make it harder to sell an asset

Negative equity is when you owe more on an asset than it’s worth, making it harder to sell or refinance. However, you still have options. You can work toward reversing negative equity by making payments, adding value to the asset, or exploring specialized refinance programs.

Looking to refinance your current mortgage or purchase a new home? Apply for a loan with Rocket Mortgage today to explore your options.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.

Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rate or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.