What happens if a homeowner owes more on their mortgage than the current market value of their home?

When a homeowner owes more on their mortgage than the current market value of their home, this situation is referred to as having negative equity. Negative equity occurs when the outstanding balance on a mortgage loan exceeds the home's fair market value, meaning that if the homeowner were to sell the property, they would not be able to pay off the mortgage in full. This can lead to financial challenges for the homeowner, as they have an obligation that outweighs their asset's value.

In contrast, the other options do not accurately describe the situation. The home cannot be considered an asset without any liabilities if the homeowner is still responsible for paying off a mortgage greater than its value. Refinancing typically occurs to secure better loan terms, but negative equity often presents barriers to refinancing without incurring penalties or additional costs. Lastly, while it is possible for home values to increase over time, that is not guaranteed and does not address the immediate issue of the homeowner's financial balance. This highlights why the concept of negative equity is crucial for understanding the implications of mortgage obligations in relation to property value.