:

Why do I have to borrow my own equity?


I'm almost sure this is a stupid question, but it seems like if I paid that portion of my mortgage (my equity), that portion belongs to me in some sense. Why do I have to "borrow" from it and pay interest on it, if it's already my own money?
Thanks, Rog
--- news://freenews.netfront.net/ - complaints: snipped-for-privacy@netfront.net ---
Reply to
Roger

Roger writes:
It's not clear what you're actually asking, but perhaps you need some clarification on what equity is and what a home equity loan is.
Equity is what's left after all the debts have been paid off. The actual value of it varies all the time, of course. But it's NOT "the portion of your mortgage you've paid off". If you took out a $100,000 mortgage to buy a house for $125,000, you have $25,000 equity the day you bought the house. If the house goes down in market value by $20,000, you have, theoretically, $5000 equity now -- it's not directly related to how much or how little of your mortgage has been paid off but rather the difference between your remaining debt and the actual value of the property. If the house never changes in value but you pay down your debt, then, yes, your equity increases exactly with those paydowns.
As far as the home equity loan, there's a difference between borrowing your equity (which you really can't do -- see above) from yourself and borrowing cash from a bank. When you get a home equity loan you are borrowing money from the bank, not yourself. The loan is *collateralized* by the house and equity - if you default on the loan, the lender has a claim on the house.
But make no mistake - when you take out a home equity loan, you are not borrowing from yourself. You are borrowing from the bank. And the bank has every reason to charge you interest on that money. Why wouldn't it?
The flip side is that if the home appreciates in value, that increase in value falls to the equity as well -- the bank doesn't get to keep that appreciation - the owner of the equity -- you -- do. In the example above, if the house goes from $125,000 to $150,000, the bank doesn't get to keep any of that increase. You suddenly have $50,000 in equity -- which you may use as collateral or, if you sell the house and pay off the loan, you may spend any way you like. And that same logic applies to the home equity line, too -- if you borrow against the equity and the house appreciates in value, your loan from the bank hasn't changed - you still owe the bank the same amount of money. The bank may be happier, though, in that if you do default on the loan, the more equity there is in the house, the more likely the bank will get its loan paid back.
That help?
--
Plain Bread alone for e-mail, thanks.  The rest gets trashed.
Reply to
BreadWithSpam

What do you mean "have to"? Who is forcing you to do so?
I think the real question you are asking is, "why won't someone give my my equity in cash?" Well, who do you suppose would do that? And why would they? To access the equity in any sort of property, you have to either sell it or borrow against it. If you can sell part of your house to another party, then you won't have to borrow anything. Or sell the entire thing and pay off the remaining mortgage, leaving the equity in cash.
Brian
--
Day 554 of the "no grouchy usenet posts" project.
Reply to
Default User

Because you get to keep your house. You now have your home PLUS your home's equity (in cash). If you want to get the equity out of your home without paying interest, sell it.
Reply to
kastnna

It's not your money. You exchanged it for the house.
Think of it this way: if you paid all cash for the place, why would anyone lend you what you mistakenly characterize as "your own" money (without charging you interest on the loan)? Again, just to make it clear, you exchanged "your money" for someone else's house. Now *they* own "your money" and you own "their house."
Not to 'soap box' this, but possibly one of the reasons for the bubble in real estate is that people conceptualized a house as a source of financing and of "equity." As Bread explained in detail, the "equity" fluctuates, and is only realized when you exchange your house for the buyer's money. Because so few people can pay for a house, a "mortgage" is almost a given, but the word itself means a schedule of payments of interest + principal which will "liquidate" ("kill") the loan.
It isn't a "stupid" question; it's a request to clarify a confusion which to many is 'smoke and mirrors' of mortgages and equity and fees and charges. Keep the basics straight. You didn't deposit your money with the bank as a "down payment" - you actually bought the entire house, from the dirt to the highest shingle. The seller took the check for the price, paid off whatever remained of his loan, and kept the balance. "Your" bank agreed to finance what you did not have the money to pay for (lent you the balance of the settlement price).
Reply to
dapperdobbs

In article ,
I see, thanks Brian.
Rog
--- news://freenews.netfront.net/ - complaints: snipped-for-privacy@netfront.net ---
Reply to
Roger

In article ,
Yes, thank you very much!
Rog
--- news://freenews.netfront.net/ - complaints: snipped-for-privacy@netfront.net ---
Reply to
Roger

Equity isn't money. You are borrowing money6 and putting your home up as collateral in case e you don't pay the money you borrowed back. The lender charges you a fee for that (interest.) Thumper
Reply to
Thumper

Your equity in your home shows up on your balance sheet as the difference between the market value of the house and the mortgage.
But you can't spend equity. You have to borrow cash using the equity as collateral.
Frank
Reply to
FranksPlace2

Well, if you do not want to borrow it, just take your home equity to your grocery shop and see how much you can buy with it.
i
Reply to
Igor Chudov

You aren't paying interest on it.
The way mortgages work, you pay interest on the unpaid balance of the loan at the fixed interest rate (assuming it's a fixed-rate mortgage).
You might say, "But my monthly payment is constant." Sure, but the split of that payment between interest and principal changes each month. As you pay off the loan, the interest portion decreases.
Reply to
zvkmpw

I think he's talking about paying interest on the money he borrows for his equity loan. Thumper
Reply to
Thumper

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.