As real estate values fall, some home owners are finding that they have negative equity. This means that the owner owes more money to the bank in mortgage(s) than the property is actually worth. Even if the home is sold, the owner still owes the amount of the negative equity on his or her mortgage.

For example, someone buys a house for $300 thousand dollars, with a down payment of $50,000. He eventually pays off $10,000 of the mortgage principal, but the home’s value falls to $230 thousand, thus he has negative equity. Here are some possible options for what to do if you have negative equity…

A. If you can still afford to make the monthly mortgage payments, consider waiting to see if property values (and your equity level) eventually rise. However, values may additionally decrease before they go up again.

B. Making improvements or repairs to the home will improve your equity and increase the property’s chance of selling. In some cases, this only produces a net gain if you carry out the work, rather than hiring a contractor.

C. If possible, selling the home and using other assets to pay off the remaining mortgage balance will prevent damage to your credit record. However, it will probably not be possible to afford buying another residence.

D. Allowing foreclosure to occur will result in a poor credit score and loss of the home. On the other hand, you will not have to pay for the negative equity portion of the mortgage if this happens.

E. Banks will sometimes approve a “short sale”; according to wikipedia.org, this means that the bank lets an owner sell his/her home for less than the total owed on the mortgage, and accepts that amount as repayment for the full balance.

F. Filing for chapter 13 bankruptcy can enable you to gain more favorable mortgage payment terms without losing the home, or at least delay foreclosure. However, it will have a negative effect on your credit record.

An appraisal should be used when determining what level of equity you have. City tax assessments do not always reflect the market value, and some realtors may intentionally underestimate the home’s worth so that they can sell it more quickly and gain a commission. Monitoring the general trends in regional home values should give you an idea of whether your equity is going up or down, and if it is still negative.