[ClassicSpiderman]

I live in Canada, so the concept of interest-only mortgages and borrowing against the increased value of your home seems foreign to me.

Now, I wouldn't want to turn my home into an ATM machine, but if I did, how does the process work? Do I call the bank and tell them that my house has doubled in price and I want to borrow $100,000 against the increase in equity?

When you borrow against your home, is it with the understanding that the bank will have a "lien" against the home once it's sold? What happens to these borrowing actions against perceived equity when the housing market crashes?

I know 'why' people like to turn their homes into ATM machines--but I just don't understand the 'how' of it.

[Lighthouse]

Don't it's a bad concept. In a real estate dowturn you end up with negative equity. Bad, very bad ...

[ClassicSpiderman]

$this->bbcode_second_pass_quote('Lighthouse', 'D')on't it's a bad concept. In a real estate dowturn you end up with negative equity. Bad, very bad ...

[Lighthouse]

$this->bbcode_second_pass_quote('ClassicSpiderman', '.')..

home equity loans still have to be repaid.

What is the point of borrowing against your house if that just means more payments each month?

[Kingcoal]

I like your prefix: "I'm from Canada," like you don't have home equity loans in Canada. Anyway, all you have to do is apply for a second mortgage or home equity loan. The bank will do the rest. They will send out an appraiser who will generally overstate the value of your home, and then the rest is based on your credit history.

The analogy is wrong; ATM machine implies that you have a bank account to withdraw from. A better analogy is "how do I treat my house like a credit card?" You have to pay that money back, plus interest. Mortgage interest is tax deductible generally, thus some Americans mortgage themselves to the hilt. I've seen the aftermath of such foolishness however. A couple I know took out a couple home equity loans on their house and bought cars, motorcycles, pool tables, etc, with the money. Two people had three cars and three motorcycles. While I'm all for my 'old lady' riding her own hawg, this is living beyond your means. The old man lost his job and they were in a world of hurt. They had used the loan money as down payments on vehicle loans and created a house of cards. Their debt payments looked like this: six vehicle loans, two home equity loans, one primary mortgage and several credit cards. Talk about riding full throttle off the cliff...

On the other hand, if you are a doomer and think that "collapse is right around the corner, then the above example ain't bad. If the world is going to end, go out with a bang.

[Lighthouse]

$this->bbcode_second_pass_quote('Kingcoal', '.')..

On the other hand, if you are a doomer and think that "collapse is right around the corner, then the above example ain't bad. If the world is going to end, go out with a bang.

[RacerJace]

$this->bbcode_second_pass_quote('Kingcoal', 'I') like your prefix: "I'm from Canada," like you don't have home equity loans in Canada. Anyway, all you have to do is apply for a second mortgage or home equity loan. The bank will do the rest. They will send out an appraiser who will generally overstate the value of your home, and then the rest is based on your credit history.

The analogy is wrong; ATM machine implies that you have a bank account to withdraw from. A better analogy is "how do I treat my house like a credit card?" You have to pay that money back, plus interest. Mortgage interest is tax deductible generally, thus some Americans mortgage themselves to the hilt. I've seen the aftermath of such foolishness however. A couple I know took out a couple home equity loans on their house and bought cars, motorcycles, pool tables, etc, with the money. Two people had three cars and three motorcycles. While I'm all for my 'old lady' riding her own hawg, this is living beyond your means. The old man lost his job and they were in a world of hurt. They had used the loan money as down payments on vehicle loans and created a house of cards. Their debt payments looked like this: six vehicle loans, two home equity loans, one primary mortgage and several credit cards. Talk about riding full throttle off the cliff...

On the other hand, if you are a doomer and think that "collapse is right around the corner, then the above example ain't bad. If the world is going to end, go out with a bang.

[Kingcoal]

$this->bbcode_second_pass_quote('Lighthouse', '')$this->bbcode_second_pass_quote('Kingcoal', '.')..

On the other hand, if you are a doomer and think that "collapse is right around the corner, then the above example ain't bad. If the world is going to end, go out with a bang.

[Lighthouse]

$this->bbcode_second_pass_quote('Kingcoal', '.')..

Hold on there buddy, I said, "if you are a doomer" I'm not. I live with very low levels of debt. However, if you are a person who feels that society is about to collapse, then debts shouldn't really matter to you.

[Leanan]

The key is falling interest rates. When interest rates are falling, you can re-finance your house at a lower rate. Your monthly payments will be smaller because you're paying less interest. So you can take out a second mortgage/borrow against your equity without actually increasing your payments.

Note that this stops working when interest rates stop falling. Hence the concern now.

[thuja]

Leanan's right- that's how it was going up until a couple years ago. People who purchased their home and had a 200,000 $ mortgage at 8 percent initially, could take out a new loan 3 years later for 250,000 at 6 % and essentially pay the same amount per month. They will pay off their loan very near to the same time and suddenly have 50,000 $ to...buy toys, remodel, go on a round the world trip. It was like easy and free money.

So now the game is over. All of us who have fixed our mortgages at historically low rates will never be able to take money out of our homes in the form of refinancing a new mortgage...because it would be stupid.

If I have a 200,000 mortgage at 5.5 % and I'm paying 1135 a month, and then I want to pull out 50,000 and refinance a new 250,000 loan at 7 %, I'll owe 1663$ a month. That means I'll pay 528 dollars more a month to get that 50,000.

I'll be paying 350,000 % in interest on the life of my new loan versus 208,000 on the first loan. That 50,000 dollar loan is actually costing me 142,000 dollars extra in interest.

Now that's just now, when interest rates have jumps a tad. If they jump up like the old days (80's), we could see 10,15, or 20 % interest rates. That's when you'll really understand the term "locked-in" interest rates. You will never want to leave the safety of your 5,6, or 7 % fixed rate that you secured in the last few years.

So most people who want to get money out will get it out in the form of a HELOC, or Home Equity Line of Credit. A HELOC usually has higher interest rates and a shorter payback period. But it does not affect your original mortgage loan which most people will want to leave unscathed. HELOCs can be found near 8 % now so they are not a bargain.

For example, taking out 50,000 dollars in a HELOC would cost you 600 $ more a month at 8 % over 10 years. Your would actually owe more per month than if you refinanced your house with a new mortgage. But it would be smarter to take out the HELOC because you pay off the debt faster (10 years versus 30 years) and you would only pay 23,000 in additional interest whereas you would pay 150,000 in the above example.

So as long as your home has accrued in value you should have no problem "using your house like an ATM". But you better have a smart plan for that money, or a job that will easily pay off that new debt. Most POers would scoff at the idea of taking a HELOC or refinancing their mortgage to take out additional debt. I'd have to say I agree with them.

[aflurry]

$this->bbcode_second_pass_quote('thuja', 'L')eanan's right- that's how it was going up until a couple years ago. People who purchased their home and had a 200,000 $ mortgage at 8 percent initially, could take out a new loan 3 years later for 250,000 at 6 % and essentially pay the same amount per month. They will pay off their loan very near to the same time and suddenly have 50,000 $ to...buy toys, remodel, go on a round the world trip. It was like easy and free money.

[dbarberic]

$this->bbcode_second_pass_quote('Lighthouse', 'W')hat is the point of borrowing against your house if that just means more payments each month?

[jdmartin]

$this->bbcode_second_pass_quote('RacerJace', '
')My answer to this question is:

Alternatively, if you have a morgage debt and good job security get a 5+ year fixed interest loan and let inflation whittle away the real value of the debt. A 6% interest rate in a 9%+ real inflation rate means you could actually be making 3% on the real value of the property by having a loan. But keep in mind this may or may not beat the drop in rate of property value as people default and the market gets flooded. Nothing would be worse than servicing a debt that is greater than the real value of the asset. Which is exactly what the ATM equity folks will be doing when the bubble bursts.

The idea of going on a headonisitic splurge and racking up the debt to the max has crossed my mind. We are living in the best of times so why not make the best of it. What are the consequences ... prision, labour camps or just a blacklisted credit rating (bankruptcy) before we all have to compete for the last potatoe at the supermarket.

The sobering thought that counters this idea is the likelyhood of my children being burdened with the debt and consequences for the rest of their lives.

.

[thuja]

When doing financial analysis to decide if you want a loan, you must

1) Decide if you will likely keep your job in an economic downturn and possibly a Great Depression.

2) Can you afford to make payments on your mortgage and new loan if a downturn affected you financially.

3) Can you use your money constructively so you effectively beat the interest rate of your loan? (For example, taking out a 6 % HELOC a couple years ago to buy copper would have been a damn smart bet, but a hell of a gamble.) Remodeling a house to add an apartment to take on renters would be a pretty sure bet. That rent money should hopefully cover the loan payment.

In a a hyperinfaltionary world, all goods will get really expensive. Using loan money to buy energy saving devices, wood stoves, solar panels, etc. when they're cheap and available is a great idea...if you know you can cover the debt in an economic dowturn.

[linlithgowoil]

My sister and her husband converted about £15,000 of their unsecured debt into a further loan secured on their house which has almost doubled in value in 6 years.

I couldnt believe they had done that. They have essentially taken a big chunk of debt that they could have defaulted on and had their house safe, and converted it into very long term debt that they'll pay a ton more interest on and which, if they cant pay, they'll lose their house.

Madness. Anyone borrowing money to buy ephemeral consumerist items/holidays is, in my opinion, out of their fucking mind. They deserve all they get.

[MrBill]

$this->bbcode_second_pass_quote('', 'O')n the other hand, if you invest the extra $50,000 in something with a reliable return greater than the tax free equivalent of the original 8%, then it is just good financing.

[thuja]

That's a great point about shifting debt Mr. Bill. Probably the smartest reason to take out a HELOC is to pay off high interest credit card debt. If you are paying 12,15, or god forbid 20 % on unstrctured credit card debt, and you can't pay it off quickly, take outr a HELOC to structure that debt at a fixed rate of 8 %. Your shaving lots of money off your regular payment by not paying increased interest rates.

[dbarberic]

$this->bbcode_second_pass_quote('thuja', 'T')hat's a great point about shifting debt Mr. Bill. Probably the smartest reason to take out a HELOC is to pay off high interest credit card debt. If you are paying 12,15, or god forbid 20 % on unstrctured credit card debt, and you can't pay it off quickly, take outr a HELOC to structure that debt at a fixed rate of 8 %. Your shaving lots of money off your regular payment by not paying increased interest rates.

[thuja]

Hey- agreed dbarberic- If you're the type to max out high interest credit cards, you're probably not going to stop when you HELOC it once. Add in the fact that the HELOC is tied to the home and could mean foreclosure if its not paid regularly, and you have a recipe for disaster.

So, yes HELOCs for responsible financially prudent people...otherwise, no more debt for you!