Negative Equity

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When you buy property you hope that the value of the property will appreciate, that is, go up. You therefore hope that one day you can sell the property and make a profit. But if the opposite happens and the value of the property depreciates, you could be in the position of not being able to get enough money from the sale of the property to pay back your loan to the lender. Not only would you not make any profit, you could actually lose some of your original down payment, as well as any of the additional equity you might have built up over time. Here is an example. You buy a house for $100,000 with a $20,000 down payment and a mortgage loan for $80,000. After three years the value of the house drops to $60,000 and for various reasons you must sell it. You sell the house for $60,000 but you still owe the lender most of the original $80,000 loan. The money from the sale must be given to the lender - including the $20,000 you contributed as the down payment (and after that you still owe the lender nearly $20,000). Not having enough money from the sale of the house to repay the lender is called negative equity.