Home-Equity Loan
You bought your home a dozen years ago. Paid 60k down. Took out a loan for 300k. And you vociferously told the your mansion-y $360k 2-story...story.
Insert "DISSOLVE" here, because time passed.
Kids. Wife. (In that order.) Then a dog. And you need a bigger car. One that actually works when it rains (i.e. windows should not be optional). So you need a quick $30k to buy it, in addition to the $5k you’re going to put down. Yes SUVs are about $35k for normal, non-Tesla people.
You need a loan for $30k and you have 2 choices. You can get it from Smilin’ Fred’s auto dealership and pay 11% interest. Or you can simply pledge the equity in your home as collateral and get a bank to loan you that same money for 5%. The 6% spread on 30 grand is some 1,800 bucks a year...and yeah, that’s a lot of dog chow.
So how did this magic happen?
Well, your home went up in value over the last dozen or so years. In fact, the highly conservative, boxer-not-brief-wearing banker who appraised it thought that $750k was a reasonable sales number “in distress.” That is, if the bank had to quickly sell your home because you defaulted on some loan, even the knucklehead bank people could get $750k for it, meaning that a sharp-toothed realtor could probably get $800k. Anyway, you paid down your $300k loan to be just $200k that you now owe...so with a home conservatively worth $750k and loans on it of only $200k, you have home equity of some 550 grand.
That’s net cabbage to you if you ever sold the home and paid off your loan and ignored taxes and realtor and closing costs for the purpose of this problem.
Anyway, the big question runs, “Why such a diff?” Well, think about the risk. In the case of an auto dealer loaning you 30 grand against your 5 grand down payment on an SUV that depreciates 10 grand the first 4 months you drive her…well, there’s a lot of risk.
Like, if after 4 months you make a run for the border, dump the family, and decide to live the rest of your life as a surfer dude bum, there’s not a ton the car dealership can easily do. Yes, they can claim your home or other assets, but they hate doing that. It costs a fortune, is bad press, and a bunch of other things. But in the case of your collateral, i.e., the value in your home being $550k, the bank can sleep well at night as far as loan risk goes, should something go awry...they can simply sell your home, pay off your first mortgage, and then have plenty of dough left over for that home equity loan thing.