When the value of an asset falls below the outstanding balance on the loan used to purchase that asset. Negative equity is calculated simply by taking the value of the asset less the balance on the outstanding loan.
The equity in the investment is the difference between how much the purchased item is worth and how much still owes on the loan. If the amount owing on the loan becomes greater than the value of the investment then the difference between these two figures is known as negative equity. This can happen for a number of reasons, but the most common is due to an unforeseen decline in the asset's value.
For example, negative equity often occurs when a homeowner purchases a house using a mortgage and then the economy starts to slow or home prices start to drop. After the house purchase, the value of the home decreases below the value of the amount owed on the mortgage, causing negative equity.
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