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Old 10-11-2013, 10:00 PM
 
Location: NE USA
120 posts, read 218,676 times
Reputation: 129

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Hypothetical questions:

My home+land has assessed value $x and my mortgage is near enough $x. Imagine I have paid off the mortgage.

Say interest rates rise and that causes a depression in home values.

This depression in price would only affect my home value if I tried to sell correct? What if I wanted to borrow against the equity in the house - is that what I paid or what the 'value' is?

Thanks for any insight.
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Old 10-11-2013, 11:20 PM
 
16,527 posts, read 17,592,629 times
Reputation: 23645
The value in or of your home is relevant only at the present time. If you sold it would only be worth x amount ( whatever someone is willing to pay for your property). You pay a commission to the realtor that is based on the TOTAL sale amount. After closing costs fees commission and the payoff of the remaining loan balance whatever money is left is yours.

If you borrow against your house you are borrowing against a percentage of the perceived value of your home. Usually you must have equity because I doubt a bank will loan you money on a house that is upside down. At one time banks were loaning 100-120% of value but those days are long gone. I think now banks do 80% LTV as long as you have 20% equity but keep your fingers crossed. They may eat a stupid sandwich soaked in idiot sauce and may loan again at 100-120% LTV.
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Old 10-12-2013, 07:57 AM
 
4,483 posts, read 7,953,787 times
Reputation: 6415
Quote:
Originally Posted by TheHausMaus View Post
This depression in price would only affect my home value if I tried to sell correct? What if I wanted to borrow against the equity in the house - is that what I paid or what the 'value' is?
What you paid is irrelevant. It's based on "todays" value. If you paid $200,000 and you owe $180,000 and the house value is appraised at $100,000 no one is going to give you a loan.
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Old 10-12-2013, 11:35 AM
 
1,263 posts, read 2,649,060 times
Reputation: 1873
Quote:
Originally Posted by Electrician4you View Post
The value in or of your home is relevant only at the present time. If you sold it would only be worth x amount ( whatever someone is willing to pay for your property). You pay a commission to the realtor that is based on the TOTAL sale amount. After closing costs fees commission and the payoff of the remaining loan balance whatever money is left is yours.

If you borrow against your house you are borrowing against a percentage of the perceived value of your home. Usually you must have equity because I doubt a bank will loan you money on a house that is upside down. At one time banks were loaning 100-120% of value but those days are long gone. I think now banks do 80% LTV as long as you have 20% equity but keep your fingers crossed. They may eat a stupid sandwich soaked in idiot sauce and may loan again at 100-120% LTV.
That's the best description of the housing bubble I've ever seen!
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Old 10-12-2013, 11:43 AM
 
1,263 posts, read 2,649,060 times
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If you bought your house for 250k, and it would sell today for 200k (based on recent comparable sales in your neighborhood), then any equity valuation would be based off the 200k.

As mentioned by prior posters, banks would typically lend cash-out no more than 80% LTV* in today's market. That means of the 200k resale value, banks would lend 160k. However, any existing indebtedness on the house needs to be taken out of that 160k.

In other words, if you bought for 250k, the home value sunk to 200k, and you owed 120k on your current mortgage, you could borrow roughly 40k (assuming 80% LTV).
200k * 80% = 160k.
160k - 120k = 40k

[* LTV means "loan to value"]
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Old 10-12-2013, 04:01 PM
 
Location: NE USA
120 posts, read 218,676 times
Reputation: 129
Great, thank you all very much for the LTV explanation. I always try to think ahead about making huge financial decisions and while I don't consider my house 'investing', it still makes me nervous to sink thousands of dollars into a 'value' that might not be there in a decade. My market didn't bubble and crash like so many but I also don't believe things increase in value, in perpetuity.
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Old 10-12-2013, 07:46 PM
 
16,527 posts, read 17,592,629 times
Reputation: 23645
Quote:
Originally Posted by TheHausMaus View Post
Great, thank you all very much for the LTV explanation. I always try to think ahead about making huge financial decisions and while I don't consider my house 'investing', it still makes me nervous to sink thousands of dollars into a 'value' that might not be there in a decade. My market didn't bubble and crash like so many but I also don't believe things increase in value, in perpetuity.

Look at your house as a place to LIVE in and raise your family. Not as a investment. I have absolutely no interest in knowing what my house value is. I really don't care. I don't sell or borrow against my properties. Never have never will. Keep making your payment and add another 20-40 bucks or more if you can afford it to the monthly payment towards the principal every month.
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Old 10-12-2013, 09:28 PM
 
1,263 posts, read 2,649,060 times
Reputation: 1873
Quote:
Originally Posted by Electrician4you View Post
Look at your house as a place to LIVE in and raise your family. Not as a investment. I have absolutely no interest in knowing what my house value is. I really don't care. I don't sell or borrow against my properties. Never have never will. Keep making your payment and add another 20-40 bucks or more if you can afford it to the monthly payment towards the principal every month.
Exactly. Over the last 150 years, US real estate on average has only increased about 0.5% per year, inflation adjusted. We're had several national real estate booms in living memory (the late 90's and then the big one recently), but that's not the norm. Home price appreciation is typically slow and not very profitable.
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Old 10-14-2013, 07:35 AM
 
Location: Rheinland-Pfalz, Germany
693 posts, read 925,385 times
Reputation: 610
Quote:
Originally Posted by Electrician4you View Post
Look at your house as a place to LIVE in and raise your family. Not as a investment. I have absolutely no interest in knowing what my house value is. I really don't care. I don't sell or borrow against my properties. Never have never will. Keep making your payment and add another 20-40 bucks or more if you can afford it to the monthly payment towards the principal every month.
Well said! take a rep from me
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Old 10-14-2013, 08:52 AM
 
Location: Southern California
4,350 posts, read 4,944,071 times
Reputation: 2129
Quote:
Originally Posted by TheHausMaus View Post
Great, thank you all very much for the LTV explanation. I always try to think ahead about making huge financial decisions and while I don't consider my house 'investing', it still makes me nervous to sink thousands of dollars into a 'value' that might not be there in a decade. My market didn't bubble and crash like so many but I also don't believe things increase in value, in perpetuity.
Although you don't consider your house investing , what do you call deciding what type of mortgage to get for it? When you consider a 15 year over a 30 year loan, or use cash , isn't that considered an investment decision.

If you wanted to borrower against your house in the future and it was all paid off , a lender will lender lend may lend you money based on a current appraised value, which as mentioned earlier , is the perception of usually one person, the appraiser. Being such , it will vary from appraiser to appraiser. If the value is high and the rates is low and you think the value will fall, and you want to pull out cash now to have it in the future , there is a cost associated with this, that is interest rate. If you wait to pull out the money in the future , the value may no longer be there. That is the risk of speculating, you either pull in out, or 'don't pay it off' now and pay the interest, or pull it out later an an unknown interest rate and unknown value.

If you had an FHA loan what was not completely paid off that brings up a bunch of different lending scenarios.

Now you are considering not sinking thousand of dollars into a 'value' that might now be there in a decade, what are your options? Are you forecasting that values will drop as interest rates go up, then you might be upside down on a mortgage , even if they did, what would you do?

If paid off your house , you simply don't have a mortgage or rent expense anymore. If you had the opportunity to pay off your home, or invest it in a manner where your rate of return is higher than your interest payment , then it makes sense to not pay off your home, but we've seen in history , too many people who felt they were better and smarter, borrower at a low interest rate thinking that they could make money with other people's money and that blew up with the stock market bubble and the housing bubble. They felt the market would increase faster that the interest rates. Well, it didn't happen.

Let's take it to an extreme, If you take an interest only loan for the next 10 years, you didn't sink any extra principal back into your property , and in 10 years you have 20 more years to pay off your remaining balance. Look at the two scenarios, if the value goes down due to interest rates, you should have more cash on hand than if you paid down the mortgage. You are speculating that interest rates are going up, the cash on hand should be able to work harder for you. What if he value goes up, you have more cash but that cash doesn't buy as much due to inflation.

Once you have a house and a mortgage , you have to assess your own investment risk level. I don't think I've ever run into someone that said , I wish I had a mortgage ! I do know people that say , they wish they didn't have a mortgage.
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