What Does Mortgage Equity Withdrawal Mean?
Mortgage equity withdrawal (MEW) is the removal of equity from the value of a home through the use of a loan against the market value of the property. A mortgage equity withdrawal reduces the real value of a property by the number of new liabilities against it.
Understanding Mortgage Equity Withdrawal (MEW)
Mortgage equity withdrawals are a common practice during times of economic boom and rising home prices. If the value of a property increases at the same rate as the mortgage equity withdrawals, the real value of the home remains constant. Issues arise, as they did in the financial crisis of 2007-2009, where home prices decrease to below the value of the liabilities outstanding, as this creates a negative real value of the property to the owner.
For example, say someone has a $95,000 mortgage balance on their home, and the home’s market value is $140,000. The homeowner may be eligible to obtain an MEW up to $45,000, which is the market value subtracted by the mortgage balance, to find $45,000 in equity. If the homeowner obtains an MEW of $10,000, the value of equity reduces from $45,000 to $35,000.
Why Mortgage Equity Withdrawal Matters
Mortgage equity withdrawals are loans that use the value of a mortgaged property as collateral. When a property is worth more than is owed on it, it is considered to have positive equity. In this case, the equity could be used as collateral for a new MEW.
Borrowing against home equity in the form of an MEW is simply collateralization of an asset. MEWs can be used to withdraw cash from what is generally considered an illiquid asset, or an asset that is not easily reverted to cash. Withdrawal of home equity results in the downsizing of the asset in a manner which does not result in establishing a lien against the entire asset. However, MEWs can be risky given the chance that the mortgaged property could decline in value once equity is withdrawn. Should this occur, it is possible that the balance on the mortgage could exceed the market value of the mortgaged property.
Home equity is the value of a homeowner's interest in their home. This value fluctuates over time as payments are made on the mortgage and market forces affect the current value of that property. Equity can be attained by a down payment during the initial purchase of the home or with mortgage payments, and equity value can be increased by property value appreciation.