See: Mortgage.
You originally took a 30-year mortgage worth $400,000 (the house you bought cost $500,000...but you had recently won $100,000 in the lotto and used that as a down payment). Now, it’s 15 years later. Mortgage rates remain low and you’ve built up some equity in your home. However, the rest of your finances are kind of a mess.
You owe money on two cars you can’t really afford, you still have student loans for those three semesters you spent at clown college, plus you maxed out your credit cards with last summer’s trip to Aruba.
Time for a mortgage equity withdrawal. This process, usually actuated through refinancing or as a home equity loan, allows you to borrow against your accumulated home equity to raise cash for other reasons.
You conduct a refinancing. Your original mortgage was for $400,000 (you bought a $500,000 house with $100,000 down and took a mortgage to pay the rest). Over the past 15 years, you built up $150,000 in equity, meaning that you paid back $150,000 of the $400,000 you originally borrowed. Now, you're going to take out that $150,000 as part of this mortgage equity withdrawal process. So, when the paperwork is done, you'll once again have a 30-year mortgage with $400,000 to pay back. But you'll also have $150,000 in cash...the amount you got for cashing in your accumulated equity.
You can use that money to pay off your higher-rate debt. Also, there's an extra tax bonus from using the mortgage equity withdrawal to pay off other loans. The interest paid on a home loan is tax deductible. That's not true for most other loans...a car loan, for instance, is not tax-deductible. So, by using a refinancing to pay off other bills, you end up paying lower interest on the money borrowed, and getting to save on your taxes, as opposed to if you were using some other form of loan to get the cash.
Meanwhile, if interest rates remain similar to when you got your initial mortgage, your monthly payments might not change much. You just have to start from scratch paying off the new mortgage. You had 15 years left...after the refinancing, you're back to 30.
Related or Semi-related Video
Finance: What is Adjustable-Rate Mortgag...17 Views
Finance allah shmoop What is adjustable rate mortgage or arm
Well here's an arm and here's a leg and that's
What Renting the money to buy a home costs you
Yeah Okay Eight r m stands for adjustable rate mortgage
The rate well that's The interest cost of the money
or the cost of renting that money to buy the
home Well the rate isn't it fixed in this case
like five point seven percent for thirty years Where you
know in advance that your monthly payments going to be
nine hundred forty three bucks a month or whatever it
is that would be a fixed mortgage a fixed number
You can count on it for all three hundred sixty
payments And then the house is all yours So that's
fixed then what's adjustable like yes the interest rate changes
But how does it change Well in a standard arm
there is some global standard on which the rates are
often price like lie bore the london interbank borrowing offering
rate It's one of the key things that price is
the cost of renting money all around the world with
the actual rate of libel or is generally reserved for
banks like super cheap cost of renting money to banks
who are very likely to pay back the money with
no hassle that rate is more or less what banks
pay for running the money along with blue chip customers
in real life The banks then mark up a premium
on top of the rate that they're paying to rent
the money to themselves And then they resell or re
rent that money teo their prized customers So the pricing
of bank my views in renting money to joe six
pack could be something like lie boer plus three percent
or three hundred basis points So if libel or is
it didn't say two and a half percent today the
adjustable rate might be five and a half percent and
all that's great honor given alone It might mean that
for a while you're paying seven hundred twelve dollars a
month for your house payment wonderfully cheap and in fact
banks market these low rates initially to help people be
able to afford tto by that new home and live
of the dream You know the american dream usually with
an arm there's a teaser rate that starts really low
Like at live or live or plus ten basis points
or something like ridiculously cheap for six months or a
year something like that Then it has an incremental set
of step ups in interest costs and venit adjust with
the markets usually upward maybe upward by a lot Remember
there's a reason it's called a teaser rate but then
if we get inflation or a you know just bank
nervousness for there are weird effects from brexit or the
volume of transactions going through london or something weird happens
Well then the liquidity drops and interest rates rise So
now lie board goes up and up and up to
four and a half percent and wealth contractually in your
mortgage paperwork you have to pay live or plus three
hundred basis points no matter what So now that's seven
and a half percent interest on the dough you borrowed
and well we're that toe happen It's likely that your
monthly payment has skyrocketed from seven hundred twelve dollars a
month is something more like twelve hundred dollars a month
or more Can you handle that big of a payment
Well have you done a fixed rate loan at nine
Hundred forty three dollars a month Well you'd still be
paying on that number but you rolled the dice with
an arm and now you owe big bills There go
that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh
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