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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Example: I make $100K per year and, with decent credit and some down payment I bought a $400K house in 2018. The total house payment, with property taxes, etc., is, say $2500/mo. The bank decided I could afford a maximum of $2600/month for a moetgage payment, based on my income and debts. They ran sample probable totals for taxes, insurance, principle and interest all added together when I was applying for the loan, and that is how I arrived at an approximate price of $400K for a house when I started house hunting. (That’s like being a “prequalified buyer”.)
Now it’s 2022. The value of the houses has gone up in the last 4 years. Zillow sent me a market estimate for selling price of my house as $650K. My income has gone up to $110/K per year. Fortunately for me, I still pay “only” $2500/month on my house because I bought it when it was $400K. The reason that is fortunate is because I can’t buy my house new today. I only make $10K per year more. I have ZERO incentive to sell my house right now, even though I would, (in theory, but in real life there are seller’s fees) walk away with $250K. If I wanted to put that $250K down on another house, with all the fees involved with selling and re-buying it would only be about $200K. With my $110K/mo income, I can only make payments on just north of a $400K loan. $200K in the down payment from the sale of my other house plus the $405K loan amount I am approved for equals $605. The house I just sold was $650, so that means I downgraded my house. That is why people just stay on their houses. They can’t afford to sell and re-buy in the same neighborhood. I could borrow against that $250, but it’s not that easy, with banks requiring a loan application to see if I have 20% paid in the house (to prevent a potential PMI fee) AND am able to pay the second loan payment in addition to the $2500 current monthly payment. Or I could refinance entirely and take out some of the $250K (again, banks will want to see that base 20% intact) and have a single higher monthly mortgage payment, which will re-start a new 30 year loan. This is a lengthy example, but it shows how difficult it is to liquidate the quarter million dollars inequity my home has. That’s a really good real-life example of why there’s eqity “locked” in houses.
(Edited with my cheaters on for grammar)
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