"Tapping home equity for consumption"

:shrug: I'm confused about this one occurance. So one's home value rises by 20%, but how can that person use that rise in equity come as an advantage to the owner to refinance his/her mortgage? Not just refi, but use it for consumption.

Thank you!

 

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That means you use your house as collateral for a loan. If the house if worth more than the loan, it's safer for the bank to lend you money, since in the event you default, the bank will be able to recover their losses.

 

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So,for example, the buyer takes out another loan on another house, and so this rise in value of his/her original house helped him/her secure another loan?

Is there any way to literally cash out the equity without taking on another loan?

Thanks

 

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You can refinance for the greater value...
You pay off your first mortgage and get the difference.
You still have a "new" loan (and a bigger one) but not two distinct loans.

You can sell your house at the inflated rate and buy another cheaper house.

I don't know how else you could possibly mean.

If you have a rare baseball card, and it goes up in value because the only other one was destroyed, then who pays you money for it being worth more?
No one.
It's the same principle.

 

Yes. It is called a "reverse mortagage."

It is often used by old people, who paid off their mortgage years earlier, have few other assets, and now have some medical bills larger than they can pay, have no kids to leave the house to (or to ask for help with the bills), and do not want to sell house to pay their medical bills.

Essentially, an older house owner transfers the title, but retains right to live there, and new owner (usually a bank) pays him monthly for X years (and some "up front" money, for the medical bills, like typical mortgage's "down-payment."). I.e. it is just like regular bank mortgage, but with roles reversed.

I am not sure, but think some insurance companies are starting to offer these deals with former old owner remaining in the house, collecting monthly payments, "for the rest of his life". Don't worry about the insurance company. -They know what they are doing. Not uncommon that the former owner signs the contract, goes to hospital a few days later and soon dies there, with insurance company selling the house quickly (well below market, but with a hugh profit).

 

There is a huge problem with this practice, and the entire economy may soon eat it. In the past this always worked, because even though debt was going up home equity went up faster.....however, lately the real estate market has been overcome with debt rising faster then equity. When that happens you could see an economic collapse....why? Because everytime there's a foreclosure when someone out consumes their equity the value of all of the houses in that neighborhood takes a hit. Many new home owners in that neighborhood might be using ARMS, or a variable rate mortgage to pay for their homes, suddenly their 500 bucks a month payment becomes 900 bucks a month, and they can't keep up, they likely have credit debt to boot, soon then they foreclose.....this can spiral causing all homes to take a hit after hit on their value, as it has in the Detroit area recently, where a nice home can go lower then an average car now.

There's no reason it could not happen across the board.....foreclosures have doubled in my state of Tennessee, they're going up across the nation....the problem with this sort of debt, is if someone doesn't pay their credit card debt, they hurt themselves and the bank, and maybe make it harder for others to get credit, but if the real estate market collapses in this way you could see the entire economy plunge.

 

Welcome to SciForums Sgt_Fury.

Always nice to have someone join who can think, discuss (instead of name call) and has their eyes open, instead of head in the sand.

If you have time, take a look at the thread "A thought to ponder" also in the Business & Economics forums.

 

In short, it's a bad idea.

Taking out loans is a bad idea. So is sex, so is eating ANYTHING, so is getting behind the wheel of a car and going anywhere EVER.

But the point is responsibility. If you can use the institution of HE loans for your financial benefit, then go for it.

Otherwise it's a dumbassed thing to do. Cheers.

 

The other thing to remember is when you use your home equity, you've sort of already sold your home. So when it's time to really sell, you may be upside down (owe more than it's worth) depending on market conditions.

 

Hi Sandy,

thats a great point, people should take notice of this.

~~~~~~~~~~
take it ez
zak

 

Why housing price inflation is commonly called wealth creation or equity building. What wealth was built? That's insane, for some time older generations can parasitize on the younger ones using this equity chit. The point will come when younger generations will be forced to choose to live on the streets rather than create wealth for the lucky homeowners. Housing is a classic financial pyramide (and social pacifier too) for relatively poor (meaning living mostly off their labor not investments) folks.

 

Good points. I might add that this is why the sub-prime collapse is so important and now moving up into the A mortgage rank (credit step just above sub prime).

I.e. base of the "inflation wealth" has collapsed. The people who were hoping to sell current small house to "move up" are having trouble doing so as they can not find a buyer, now that the low-cost, nothing-down, balloon mortgages etc. no longer exist. Why the number of weeks a house is on the market is increasing, even during the spring / early summer when normally it should be dropping.

This house of cards, Ponzy-scheme, "inflation wealth" is now starting to fall.

 

Oh! That's because, you see, americans are BRILLIANT at economics. Specially when it comes to real estate!!!

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You see, the rich want MORE money. So they prey on suckers that know nothing about money. They create a myth, which they call the "american dream". They model the values of the popualtion since they are infant. CONSUMPTION. That's what you are here for. And you MUST have a BIGGER house, a BIGGER TV, a BIGGER boat then your neighbour. Otherwise, you are a loser. So everyone goes and buy stuff. BUY BUY BUY! They end up poor in all their "wealth". And the rich gets richer and richer on the backs of those suckers.

Americans don't seem to understand debt. There's good debt and bad debt. Good debt is when you use your money to increase your leverage. Your debt, in this case, is used to make money. Bad debt is when you use your money to buy stuff for yourself. It's not an investment- it's an expense.

So back to home equity loans.... Before them, there were credit cards. The whole idea of credit cards is that you play first and then pay later. It's an accounts payable instrument. The problem is that most people are not disciplined enough to use it wisely. And sadly enough, there's people out there that believe that credit card is "free money".

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Home equity loans is the latest of those consumerism tricks. They are basically stealing your equity. They give you the money you have in your equity, and that money is usually used to consume useless crap. Then you are back to square 1! You now have to repay the money you spent, as if it was the mortgage all over again! And with interest!

No wonder the US has over $9 trillion dollars in consumer debt!!!!

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WOW! Someone in the Business & Economics forums have a brain!!!

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RIGHT ON!!!!!

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Wow! Suddenly she has a brain too! I must be dreaming or something! This must be a magical thread!

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Can you please comment on the thread below? I need someone like you, who has a brain, there...

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I INSIST, Renting is Better then Buying

:shrug:

 

You know everything, don't you, Fraggle.

Baron Max

 

Certainly much more then you. :bugeye:

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There is something deeply sad and wrong about people using their homes as "wealthbuilding" tools for the poor not a place to live. Same with land. It's not the place one lives on, cares about, it's "an investment tool".