Mortgage Equity Withdrawal

See: Mortgage.

You originally took a 30-year mortgage worth $400,000 (the house you bought cost $500,000...but you had recently won $100,000 in the lotto and used that as a down payment). Now, it’s 15 years later. Mortgage rates remain low and you’ve built up some equity in your home. However, the rest of your finances are kind of a mess.

You owe money on two cars you can’t really afford, you still have student loans for those three semesters you spent at clown college, plus you maxed out your credit cards with last summer’s trip to Aruba.

Time for a mortgage equity withdrawal. This process, usually actuated through refinancing or as a home equity loan, allows you to borrow against your accumulated home equity to raise cash for other reasons.

You conduct a refinancing. Your original mortgage was for $400,000 (you bought a $500,000 house with $100,000 down and took a mortgage to pay the rest). Over the past 15 years, you built up $150,000 in equity, meaning that you paid back $150,000 of the $400,000 you originally borrowed. Now, you're going to take out that $150,000 as part of this mortgage equity withdrawal process. So, when the paperwork is done, you'll once again have a 30-year mortgage with $400,000 to pay back. But you'll also have $150,000 in cash...the amount you got for cashing in your accumulated equity.

You can use that money to pay off your higher-rate debt. Also, there's an extra tax bonus from using the mortgage equity withdrawal to pay off other loans. The interest paid on a home loan is tax deductible. That's not true for most other loans...a car loan, for instance, is not tax-deductible. So, by using a refinancing to pay off other bills, you end up paying lower interest on the money borrowed, and getting to save on your taxes, as opposed to if you were using some other form of loan to get the cash.

Meanwhile, if interest rates remain similar to when you got your initial mortgage, your monthly payments might not change much. You just have to start from scratch paying off the new mortgage. You had 15 years left...after the refinancing, you're back to 30.