The curse of negative equity: Is there an escape?

Homeowners place false hope on price appreciation

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Homeowner equity is property value less the sum of all debts secured by the property. If equity is negative, it means that the debts exceed the property value. Homeowners who think of themselves as tenants may not be much bothered by negative equity. As long as they make their monthly payments, they can continue to live in the house, just as if they were tenants. But homeowners with a homeowner -- rather than a tenant -- mentality are looking to a future in which they build equity. For them, negative equity is a psychic burden until they rid themselves of it, and it can turn into a curse. The psychic burden comes from knowing that the portion of their mortgage payments that goes to principal only serves to reduce the amount of their negative equity. They can't start building positive equity until they cross the zero-equity threshold. Negative equity can turn into a curse if something happens unexpectedly that requires that the property be sold. Here is an example: "I work for a comp...