What Is a Mortgage Equity Withdrawal (MEW)?
A mortgage equity withdrawal (MEW) is the process of removing equity from a home’s worth using a loan secured by the asset’s market value. A mortgage equity withdrawal lowers a property’s actual worth by adding additional obligations to it.
- A mortgage equity withdrawal (MEW) is a broad term for any kind of loan that allows a homeowner to access the cash worth (equity) of their residence.
- MEWs include things like home equity loans, second mortgages, and home equity lines of credit (HELOCs).
- As house prices rise, one’s equity in their property will often grow in value.
Understanding Mortgage Equity Withdrawals (MEWs)
Withdrawals of mortgage equity are a regular practice when the economy is booming and housing values are growing. The actual worth of a house stays constant if its value rises at a pace equal to the mortgage equity withdrawals. Problems emerge when house prices fall down below the value of the existing obligations, as they did during the financial crisis of 2007–2009, since this results in a negative actual worth of the property to the owner.
Let’s take the scenario where someone has a $95,000 mortgage debt on a property with a $140,000 market value. If the market value is less than the mortgage debt, or $45,000, the homeowner may be qualified for a MEW up to that amount. The value of equity decreases from $45,000 to $35,000 if the homeowner receives a MEW of $10,000.
Why Mortgage Equity Withdrawal Matters
Loans that utilize the value of a mortgaged property as collateral are known as mortgage equity withdrawals. Positive equity is the state in which a property has more value than is owing on it. In this situation, the equity can be put up as security for a new MEW.
Collateralizing an asset is what it means to borrow against home equity in the form of a MEW. MEWs may be used to extract money from assets that are often thought of as being illiquid, or assets that are difficult to convert to cash. The asset is downsized when home equity is taken out, but not in a way that leads in a lien being placed on the whole asset. MEWs, however, might be dangerous due to the possibility that the value of the mortgaged property could decrease once equity is extracted. If this happens, it’s likely that the mortgage’s outstanding debt will be more than the home’s market worth.
The value of a homeowner’s stake in their house is known as home equity. As mortgage payments are paid over time and market factors have an impact on the property’s current value, its value changes. Equity may be acquired by a down payment at the time of the original house purchase or through mortgage payments, and equity worth can rise as the value of the property increases.
Home equity lines of credit, also known as HELOCs, and home equity loans, commonly referred to as second mortgages, are popular means to access one’s home equity.
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