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Home Equity and Refinancing a Mortgage

Will home equity prevent me from refinancing my mortgage with a different bank?

If I have a mortgage and home equity with Bank 1, can I refinance to Bank 2? Will the home equity prevent me?

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Bill's Answer
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You have a misunderstanding of "home equity." Home equity is the difference between the property's fair market value and the outstanding balance of all liens on the property. Home equity is "owned" by the person owning the property -- the home owner. It is a value on a spreadsheet -- a line item on a balance sheet. It is intangible but measurable. However, home equity is not kept in a bank account or held by a creditor.

Home equity can best be described by hypothetical example. Let us say you buy a house for $100,000 and pay $0 as a down payment. Years later comparable houses in the immediate area sell for $110,000. The balance remaining on the loan is $75,000. The homeowner's equity at that moment in time is $35,000. Now let us fast-forward again in time. Now let us say the house is worth $200,000 and remaining loan balance is $10,000. The homeowner's equity at that moment is $190,000.

The equity is theoretical. The equity does not exist anywhere but is an asset the homeowner can tap into. Let us return to our second example above and say the homeowner has a child who just completed college with $20,000 in student loan debt. The homeowner shops for a mortgage refinance and finds a bank willing to refinance the mortgage at an attractive rate and is willing to give the homeowner $30,000 in cash. The refinance retires the original loan and replaces it with a new mortgage. The homeowner gives the child a $20,000 gift to retire the student loan debt and uses the remainder to remodel the home's kitchen. The homeowner decreased his or her equity by $30,000 from $190,000 to $160,000.

The homeowner could have refinanced with the original mortgage company. However, the homeowner is under no obligation to do so.

If you are shopping for a mortgage refinance, visit the Bills.com mortgage refinance savings center to get no-cost quotes from up to four pre-screened mortgage lenders.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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