Negative equity occurs when a homeowner owes more on their mortgage than its current appraised value, creating financial difficulties that make refinancing or selling difficult.

There are various strategies to prevent negative equity, including buying at market prices and making a larger down payment when purchasing. Furthermore, it's key that monthly mortgage payments remain on time - any missed ones could cost your equity dearly.

4 Ways to Deal with Negative Equity

1. Refinance

Negative equity can make selling your home difficult. To determine whether you have it, ask your lender for a valuation of your property or hire a surveyor to assess its value - if the valuation falls lower than what you owe on your mortgage then this indicates negative equity and may also prevent switching mortgage deals as lenders typically won't lend more than what the property is worth.

An effective way to avoid negative equity when purchasing your first home is making a large down payment and being strategic about when and where you purchase. Try not to buy at the peak of the market when home values are highest -- home prices often decline after that point. Also avoid negative equity by only viewing houses within your price range and meeting all mortgage payments on time.

2. Sell

Homeowners with negative equity have various options available to them when facing negative equity, such as selling and paying the difference, waiting until local market conditions improve, or increasing their home's value. But each option comes with its own set of costs.

An ideal scenario would see the sale of a home with positive equity at the time of sale, using any proceeds to pay off any existing mortgage loans. Therefore, any outstanding balance due to negative equity would need to be covered out-of-pocket before lenders could close on any loans that might result from selling your house.

To help increase equity, homeowners can try building up their equity by buying when market prices are low, making extra payments, or diversifying their portfolio so that if one market experiences an abrupt property market downturn the others can provide some protection. It may also be worthwhile consulting a real estate professional beforehand in order to gain an accurate assessment of the value of each property purchased.

3. Lease or Rent

Real estate property values may fall below a homeowner's mortgage balance and create negative equity for them, often seen during economic downturns when housing bubbles burst; it could also result from specific lending situations or simply bad luck.

Homeowners planning on keeping their property for an extended period and paying the monthly mortgage payments don't usually face much difficulty from this issue; however, it could make selling or refinancing harder in the future.

Negative equity can be avoided by purchasing a home within your budget, paying a larger deposit (if it makes financial sense), and keeping up-to-date on changing market trends. Unfortunately, however, no one knows exactly what lies ahead for the housing market or absolute immunity from negative equity does not exist - keeping an eye on things is the best way to deal with negative equity as the sooner you act, the better will be your financial situation!

4. Trade-in

One common method of dealing with negative equity is trading it in for a new vehicle, as this often entails rolling any debt from your current one into financing for its replacement, increasing monthly payments, and making positive equity more difficult to reach.

If you want to trade in your car but avoid negative equity, try searching for used vehicles priced under what you owe on it - this will allow you to pay off the loan faster while decreasing negative equity.

Another approach would be to keep the vehicle as long as possible and wait for any negative equity to evaporate on its own. Meanwhile, you could make additional payments toward the principal and potentially reduce interest expenses. This strategy may suit those who don't wish to purchase another car immediately, although this commitment could become permanent should its value continue to decline over time.