Understanding Mortgage Equity Withdrawal

Mortgage equity withdrawal occurs when you borrow money against the value of your house. Or, to put it another way, this is what happens when you take out a home equity loan. When you take out a home equity loan, the lender puts a second mortgage on your house and uses it as collateral. The home equity loans are usually used to finance home repairs and improvements to the property, though they can also cover other expenses. While those loans can be useful, they can backfire if you don't repay it on time.

Understanding Home Equity Withdrawal

During the US housing bubble, mortgage lenders tried to increase their profits. One of the ways they did it involved relaxing their mortgage application requirements. This allowed people with less-than-perfect credit to qualify for mortgage loans. On the short term, this was a good thing because it opened home ownership to people who couldn't otherwise afford it. But as the housing bubble continued, those borrowers found themselves struggling to make their loan payments on time, putting them in danger of default.

The mortgage lenders could not allow that to happen. If the borrowers default, they would lose money. So lenders began offering home equity loans. They were designed to decrease the borrowers' financial burden, temporarily freeing up more money for mortgage loan payments. Before long, they started offering loans to borrowers on more sound financial footing, advertising it as a way to improve their properties and pay for expenses they wouldn't otherwise be able to cover. Either way, the lenders were able to make even more profit.

Ultimately, though, home equity withdrawal only delayed the inevitable. While home equity withdrawal gives borrowers an infusion of funds, it also adds new loan obligations. In many cases, the funds generated through home equity withdrawals ran out before the borrowers had a chance to repay their home equity loans in full. As the result, they would up in more debt than before. This, in turn, triggered a wave of defaults as borrowers struggled to meet their payment obligations.

How Home Equity Withdrawl Works

If you want to make a home equity withdrawal, you can apply for home equity loans with either your current mortgage lender, or a new lender. The former simplifies the application process - they already have your financial data.

In many respects, equity loans work similarly to ordinary mortgage loans. You will still have to make monthly payments that cover both interest and principle, as well as monthly fees. Generally speaking, the interest payments are lower, at least at first. If the interest rate is variable, your payments will rise and fall over time. The home equity loan comes with it's own origination and maintenance fees.

However, there are also a few notable differences. First, if you default on your mortgage, the lender cannot automatically foreclose on your home unless it successfully completes the foreclosure proceedings. This gives you enough time to catch up on your payments or challenge the legality of the foreclosure. With home equity loan, your house automatically becomes collatoral.

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