How do people get loads of money to be able to do extensions and new kitchens.
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It’s taking out a loan that gives the bank the right to foreclose on your house to repay the loan if you fail to pay. The “re” means that you already have a loan like this, probably the one you used to buy the house, so the second loan only gets paid after the first one if your house is foreclosed. Lmk if you need further explanation of anything!
You buy your house for five hundred grand. You put down one hundred and borrow four hundred.
The value of your home goes up to seven hundred grand.
You still owe the four hundred you borrowed but now have two hundred extra available because the bank can loan you money against the increased value of the home. So, you borrow another one hundred grand and do renovations, upgrades, etc.
The bank is happy. You bought a house that went up in value and you’ve borrowed against that increase in value (which you could have pocketed if you sold at the new value) in order to increase the value of the home that the bank has a lien against. That ensures that the home won’t be abandoned and even if it is, it will still be worth more than the percentage they lended against – meaning they can more easily get back their money if they need to do so.
You buy a house for $500k with $100k down and $400k mortgage (20% equity). 10 years later, you want to renovate the kitchen. The house is now worth $600k and you’ve paid down the mortgage to $300k, so you have $300k in equity, or 50% equity in the home. Since banks will let you borrow up to 80% loan to value of home, you can tap into 30% of your home’s value, which would be up to $180k. Instead, you only need $50k for a new kitchen so you take out a home equity loan for $50k, increasing the total loans against your house from $300k to $350k. The other thing you could do is refinance your entire mortgages and pull out some equity. Not as likely an option now with rates over 6%, but a year ago somebody with a 4.5% mortgage might have done a “cash out refi” at 3%, allowing them to get a check for $50k while increasing mortgage balance to $350k but perhaps only seeing a minimal increase in payments due to lowered interest rate.
Think of your total house’s value as a combination of what you owe and the equity. Essentially: Total Value = Mortgage + Equity.
For example, If your house can be sold for $100,000 but you owe $80,000 then you have $20,000 equity. So if you sold it you would walk away with $20,000 in your pocket, not including fees and taxes.
When you refinance a home, you can move some of that equity into the mortgage and receive that amount in Cash. You can then use that Cash to do with whatever you want.
For example, let’s say you buy a house for $100,000 and finance $80,000 of it. 10 years later the house is worth $150,000 and you’ve paid of $20,000 of the mortgage. So you now have $90,000 of equity in the house. $90,000 + $60,000 = $150,000.
You can choose to refinance the property for let’s say $90,000. You then take out a new mortgage for $90,000 and use $60,000 of that $90,000 to pay off the old mortgage so you’re still left with $30,000 cash you can then use.
But, it’s important to note that you have to pay that $30,000 back along with the rest of the mortgage. So when people do this, they usually use the money for home improvement projects that will put some of that value back into the house. So, if you spend $30,000 on a new kitchen and bathroom, that could increase the value of the house by $30,000 which would return the the equity level in the house back to $90,000.
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