Oregon 30-Hour Real Estate Law Practice Test

What does the term “negative equity” refer to in real estate?

1. When a property is worth more than what the owner owes

2. When the property value declines below the mortgage balance

3. When a property cannot be sold

4. When a homeowner has an outstanding loan balance

The correct answer is: When the property value declines below the mortgage balance

The term “negative equity” in real estate specifically refers to a situation where the market value of a property is less than the outstanding mortgage balance owed by the homeowner. This means that if the homeowner were to sell the property at its current market value, they would not be able to fully pay off the mortgage, resulting in a financial loss. In the context of real estate transactions, negative equity is significant because it can impact a homeowner's ability to sell or refinance their property. Homeowners in this situation may find themselves “underwater,” meaning they owe more than the property is worth, which can limit their options for selling or borrowing against their home. When considering the other options, the first choice describes positive equity, which occurs when a property is worth more than what is owed. The third option is more related to selling potential rather than equity calculation; negative equity does not inherently prevent a sale, but it complicates it. The fourth choice addresses loan balances generally and does not specifically denote the relationship between property value and that balance, which is key to understanding negative equity.