While reading through big short , I came across this sentence, ‘People with first mortgages had vast amounts of equity locked up in their houses’. What does this mean.
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* When you buy a house, the loan you get is backed by the house itself.
* If you fail to pay, the house gets auctioned off and the money collected from the sale first goes to the bank and the rest you get to keep.
* The part you get to keep is called equity.
* But you can actually use that part without selling your house.
* You can take out a second loan on just that part.
* So now if you don’t pay and the house gets auctioned, the money goes to those banks first and then you keep what’s left.
* The difference between what you owe on your mortgage(s) and what your house could be sold for can increase quite a bit if homes prices in general go up.
* This is what they are talking about in the Big Short.
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