What Does Mortgage Equity Withdrawal Mean?

Home mortgage equity withdrawal (MEW) is the removal of the owner’s stake from the property through a mortgage loan against the property’s current market value. A mortgage equity withdrawal will reduce the actual value of property by offering new liabilities against it. 

Understanding Mortgage Equity Withdrawal (MEW)

Mortgage equity withdrawal is a common practice in times of economic growth and rising real estate prices. The property’s initial value will remain constant if the real estate worth increases with the cancellation of a home mortgage. For example, the financial crises that have occurred from 2007 to 2009. During this period, housing prices dropped below the value of outstanding debt and created a negative equity value for the homeowners.  

More so, consider someone who has a mortgage of $95,000, and the market value of the house is $140,000. The homeowner may be eligible for up to $45,000 in mortgage equity withdrawal. It is the market value subtracted from the mortgage balance to get $45,000. Therefore, the cost of equity capital dropped from $45,000 to $35,000 when the homeowner received $10,000 MEW.

Why Mortgage Equity Withdrawal Matters

A mortgage equity withdrawal is a loan that uses the value of the mortgaged property as collateral. It is considered to have positive estate equity if the home’s current appraised value exceeds the owed amount. So, the home equity could be used as collateral for the new MEW in this case.

Borrowing against house equity in the form of a MEW is simply collateralization of a property. MEW can be used to withdraw funds from assets generally considered illiquid or assets that are not easily reverted to cash. Selling the share of the house reduces the ownership of the asset, so there is no lien against the entire investment. However, MEW may be risky because the mortgaged property could decline once the funds are withdrawn. Therefore, the remaining amount of the mortgage may exceed the market value of the mortgaged property.

Home equity is defined as the value of a homeowner’s interest in their property. This value fluctuates over time as repayments are made on the mortgage, and market forces affect the present value of that residential property. Equity in property is acquired from the down payment you paid during the initial purchase of the property. After that, you get more equity through your monthly mortgage settlements. That means the contract part of the repayment is used to reduce the outstanding loan amount. You also get benefits from a higher property appraisal amount as it increases your home equity value. 

Related Terms

Mortgage Equity Withdrawal (MEW) Definition

Home mortgage equity withdrawal is the total equity value obtained by property owners from the equity they paid into their properties.

What Is Negative Equity?

Negative equity occurs when the real estate property value decreases compared to the outstanding balance of the mortgage loan used to purchase the house.

How to Calculate a High-Ratio Mortgage and What it signifies to Investors

A high-interest mortgage refers to a loan where the loan value is close to the property appraisal value being used as collateral (loan value approaches 100% value of the property).

Debt Deflation

Debt deflation occurs when the decline in prices, wages, and assets puts more pressure on borrowers’ ability to repay debts and increases mortgage defaults.  

A common problem with debt deflation is that it generates a positive feedback loop called a deflation spiral. It will increase mortgage loan defaults, and the liquidation of defaulted debts will lead to further deflation.

Second Mortgage

A second mortgage is a home mortgage that will be made when the initial home loan is still in effect. Learn about the requirements for a second mortgage and its application process.

Assumable Mortgage Loan

An assumable mortgage is financing where the outstanding mortgage loan and its terms can be transferred from the current homeowner to the buyer.

All in all, these mortgage equity withdrawal may contribute to the formation of housing bubbles. Reach out Today!