What Can Cause You to Lose Equity in Your Home?

Crystal 

Walker

Content Writer

Updated 9/30/26

Most homeowners think of equity as something that only grows. You pay the mortgage, the market does its thing, and the number gets bigger. Usually it does. But equity also leaks, sometimes all at once in a downturn and more often slowly, through borrowing, neglect, bad paperwork, and costs nobody added up. Below are the eleven most common causes, grouped by where they come from, along with the warning signs and what you can do about each one.

What Home Equity Is and How It Shrinks

Home equity is your home's current market value minus everything you owe against it, including your mortgage, any HELOC or home equity loan, and liens. It shrinks whenever the value drops or the debt rises. Falling prices, heavy borrowing, deferred maintenance, disasters, legal claims, and selling costs are the most common causes.

How Many Homeowners Are Underwater Now

Very few, by historical standards. Cotality's latest homeowner equity report found that 1.9 percent of mortgaged properties, about 1.09 million homes, had negative equity in the first quarter of 2026. At the worst point of the last housing crash, in late 2009, the figure was 26 percent. The average mortgaged homeowner held about $310,500 in equity.

National averages hide a lot, though. Cotality's economists have pointed out that recent buyers who put little down or used piggyback loans carry most of the risk, and the firm estimated late last year that a 5 percent national price drop would push roughly 319,000 more homes underwater. If you bought in the last few years with a small down payment, your cushion is thinner than the headlines suggest.

Equity Loss at a Glance

Each cause below has an early warning sign, and most have a fix that costs far less than the loss it prevents.

Market Forces That Shrink Equity

You can't control these, but you can control how exposed you are to them.

1. Falling Home Prices

When local values drop, every owner in the area loses equity by the same math. The damage is only permanent if you sell or borrow at the bottom. An owner who can keep making payments and stay put usually gets the value back as the market recovers. The owners who get hurt worst are the ones forced to sell into a soft market, whether by a job loss, a divorce, or a transfer.

Price declines have also been more local than national lately. In 2025, Cotality reported that homeowners in Florida and the District of Columbia saw average equity fall while much of the Northeast kept gaining.

2. Neighborhood and Local Market Shifts

Equity is local in a way national averages don't capture. A large employer leaving town can pull values down on your side of the metro while the overall numbers look fine. So can a rezoning, a wave of new construction in your price range, or rising crime. If a move is a few years out, pay attention to actual sales on your street and in your subdivision. They'll tell you more than any national report.

3. Disasters and Insurance Gaps

A flood or wildfire can take equity twice. There's the physical damage your policy doesn't fully cover, and then there's the drop in area values that can follow even for homes that weren't hit. Flood is the gap that catches people most. According to FEMA, standard homeowners policies don't typically cover flood damage, and a new National Flood Insurance Program policy usually takes 30 days to take effect. FEMA has also reported that 25 to 30 percent of flood claims come from properties outside high-risk flood zones.

The other common gap is outdated coverage. A dwelling limit set when you bought may not match what it costs to rebuild today. Review it every year against current construction costs, not your purchase price.

Borrowing Decisions That Eat Into Equity

This is where most equity loss is actually a choice, and where a little restraint goes the furthest.

4. Borrowing Too Much Against the House

HELOC draws, home equity loans, and cash-out refinances all turn equity into debt. That's the point of them, and it isn't automatically a problem. It becomes one when the borrowing leaves no room for a price dip. An owner who has tapped most of their equity can go underwater from a modest decline, and a maxed-out HELOC in a softening market is how people with years of ownership end up bringing money to closing.

A reasonable guardrail is to keep total debt low enough that a 10 to 15 percent price drop wouldn't wipe out your stake. Timing matters too, because most lenders won't open new equity lines once a home is listed. If a sale is coming, our guide to refinancing while your home is listed explains what's still possible.

5. Rolling Costs Into a Refinance

Even a straight rate-and-term refinance can cost you some equity if you finance the closing costs. Roll $5,000 in fees into the new loan and your balance goes up by $5,000 on day one. The same thing happens when a refinance appraisal comes in lower than you expected, since it leaves less room between what you owe and what the home is worth. Paying the costs in cash, when you can, keeps your equity where it was.

6. Adjustable Rates and Missed Payments

Rising rates don't reduce equity directly. They squeeze it from the side. A reset on an adjustable-rate mortgage or a variable-rate HELOC can raise your payment enough to strain your budget, and missed payments bring late fees, then default interest and legal costs. In a foreclosure, those costs come out of your equity before you see anything. If a reset is coming, run the new payment before it arrives. If you're already struggling, call your servicer before you miss a payment, not after. Options like forbearance or a loan modification are easier to get early.

Property Condition and Upgrades

What you do to the house, or don't, shows up in the appraisal.

7. Deferred Maintenance

This is the slowest leak and probably the most common. A roof near the end of its life, an aging HVAC system, or water getting in somewhere can all go ignored for years, and buyers and appraisers will price every one of them. Buyers also tend to discount visible problems by more than the repairs would cost, because they're pricing in risk and hassle along with the fix. Taking care of major systems while you own the home is almost always cheaper than taking the discount when you sell.

8. Renovations That Don't Pay Back

Not every project adds value. Highly personal choices, like bold finishes or a converted garage, can shrink your buyer pool. So can a DIY job that an inspector flags. Overbuilding is the other trap. A $150,000 kitchen in a neighborhood of starter homes rarely returns what it cost, because buyers compare your price to nearby sales, not to your receipts. Before a big project, ask a local agent what similar homes in your area actually sell for with and without it.

Legal and Title Threats

These are rarer than the others, but the losses can be large and fast.

9. Liens and Unpaid Property Taxes

A contractor who files a mechanics lien, an HOA judgment, or a boundary dispute can all attach a claim to your title that gets paid from your proceeds when you sell. Unpaid property taxes are the most dangerous, because interest and penalties add up and the taxing authority can eventually force a sale.

Until recently, some local governments could keep the entire sale proceeds from a tax foreclosure, not just the taxes owed. The U.S. Supreme Court ended that in 2023. In Tyler v. Hennepin County, a Minnesota county sold a condo for $40,000 to collect about $15,000 in unpaid taxes and kept the $25,000 difference. The Court ruled unanimously that keeping the surplus was an unconstitutional taking. Owners can now recover that surplus, but a forced sale rarely brings full market value, and you still lose the home. Deal with tax delinquencies and liens as soon as they show up. They only get more expensive.

10. Deed Fraud

Deed fraud, also called title theft, happens when a criminal forges documents to transfer or borrow against a property they don't own. It targets vacant land, homes owned free and clear, and properties with owners who live elsewhere, because those owners are slow to notice. The FBI recommends checking whether your county recorder offers a free notification service that emails or texts you when a document is recorded in your name. Many do. Sign up, and check your county's property records every so often.

The Cost of Selling

The final equity leak happens at the closing table, and almost everyone underestimates it.

11. Transaction Costs Come Out of Your Equity

Equity on paper is not what you walk away with. Agent commissions, title and settlement fees, transfer taxes where your state charges them, repairs, staging, and any concessions to the buyer all come out of the sale price first. Industry estimates of total selling costs generally range from about 6 to 15 percent, depending on your market and how the deal is negotiated. Commissions have been negotiable since the 2024 industry changes, so they're worth discussing with any agent you interview. 

Selling Before You've Built a Cushion

This one hits recent buyers hardest. Sell within a couple of years of buying and your equity may barely cover the costs of selling, especially if you put little down. Selling twice in quick succession can erase years of payments. If you're weighing a move soon after buying, ask an agent for a net sheet first. It shows what you'd actually walk away with after every cost.

How to Protect Your Home Equity

A few habits, most of them once a year, cover nearly everything above.

Keep a Borrowing Cushion

Decide in advance how much of your equity you're willing to borrow against, and leave room for a market dip. If you're trying to grow equity instead, our guide on how to build equity faster covers extra principal payments, shorter terms, and other options.

Fix Big Systems Before They Fail

A roof, furnace, or water heater replaced on your schedule costs less than one replaced in an emergency or negotiated down during an inspection. Keep receipts. Buyers and appraisers like to see them.

Review Insurance and Title Records Every Year

Once a year, check your dwelling coverage against current rebuild costs, decide whether flood coverage makes sense for your address, and look at your county's property records for anything recorded without your knowledge. The Consumer Financial Protection Bureau's homeownership resources cover escrow and insurance basics if you want a refresher.

Watch Local Sales When a Move Is Coming

In the year or two before you sell, track closed sales in your neighborhood. That tells you whether the market is moving your way and when to list. Our 30-day home prep guide covers the work that protects your price once you decide.

Common Questions About Losing Home Equity

Short answers to what homeowners ask most.

Can you lose equity without selling your home?

On paper, yes. Falling values and a rising loan balance both shrink equity while you own the home. The loss becomes real money only when you sell or borrow, which is why being able to stay put is the best defense in a down market.

What is negative equity?

Negative equity, or being underwater, means you owe more on the home than it's worth. It usually happens to owners who bought with a small down payment right before prices fell, or who borrowed heavily against the home. Until values recover or the balance comes down, it makes selling or refinancing difficult.

Does refinancing reduce your equity?

A cash-out refinance does, by design. A rate-and-term refinance mostly doesn't, unless you roll the closing costs into the new loan or the appraisal comes in low.

Can the government take my home equity for unpaid taxes?

The taxing authority can foreclose and sell the home to collect overdue taxes. Since the Supreme Court's 2023 Tyler v. Hennepin County decision, though, it can't keep the surplus beyond what you owed. You or your heirs can claim it. Rules for how to claim it vary by state.

Does a HELOC reduce home equity?

Only the amount you draw. An open line with a zero balance doesn't reduce your equity, but every dollar you borrow does, and a variable rate can make that debt more expensive over time.

Protecting Your Equity When It's Time to Sell

Selling is the one moment when all your equity turns into cash, and it's where a lot of it can slip away through pricing mistakes, weak negotiation, and costs you didn't plan for. The right listing agent sets the price from real local sales, negotiates repair requests before they turn into concessions, and gives you a clear net number up front. PrimeStreet starts with one call to a real person and matches you with one vetted local agent. No forms, and no pile of agents calling you. When you're ready, get matched with a listing agent who knows what your home is worth.

_{Disclaimer: This article is for educational purposes only and does not constitute financial or legal advice. Costs, rates, and guidelines vary by location, lender, and individual financial profile. Always consult a qualified professional for guidance specific to your situation.}