DEFINITION of Mortgage Equity Withdrawal
Mortgage equity withdrawal is the amount of equity that consumers withdraw from their homes through home equity loans or lines of credit and cash-out refinances. Mortgage equity withdrawal is a relevant variable in the prediction of consumer spending and, therefore, gross domestic product (GDP). This statistic is often expressed as a percentage.
BREAKING DOWN Mortgage Equity Withdrawal
Mortgage equity withdrawal is cyclical and varies based on rising home prices and, to some degree, the overall level of interest rates. An interesting feature of mortgage equity withdrawal in applying it to economic forecasting is calculating what percentage of the total equity withdrawal goes directly into consumer spending and what percentage is used to pay down existing consumer debt. Mortgage lenders market loans heavily to consumers for both reasons. Another interesting feature of mortgage equity withdrawal in applying it to economic forecasting is that consumers do not generally spend all of their withdrawals at one time.
Why Consumers Make Mortgage Equity Withdrawals
When consumers take out home equity loans or other forms of financing against the equity they have put into their homes through a mortgage, they are freeing up their assets for use with other expenses. This could include covering the cost of improvements and renovations to the home, as well as investments elsewhere. Homeowners who take out a second mortgage after paying off the first mortgage may be seen as less of a credit risk and, thus, could enjoy much more favorable interest rates.
The prevalence for mortgage equity withdrawals can be an indicator of not only consumer spending but also consumer confidence. Taking equity out of a home that is at partly paid off can bring new risks to the homeowner as they are taking on new debt that will have to be covered. There may be rate changes as the market fluctuates and affects their ability to repay the new debt. They also face renewed risk of foreclosure; however, they will once again be able to deduct mortgage interest from their taxes.
There is some debate on whether or not mortgage early withdrawals should be regulated the way certain retirement accounts are. With many types of retirement accounts, there are stipulations and penalties for early withdrawals made. Usually, there are no such restraints on making mortgage equity withdrawals. This could lead to homeowners wiping out the value and equity they invested into the home, which might have been used for their retirement needs. Furthermore, these equity withdrawals could be contributing factors in housing bubbles.