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Balance sheets, part 3: Home equity loans
comments (2) November 13th, 2011 in Blogs
Daniel Morrison, Executive editor, Fine Homebuilding & Green Building Advisor
2 users recommend
Video Length: 8:36
Sal wraps up the balance sheet lesson with a primer on home equity loans.
Q. What does your balance sheet look like when your house is revalued and you take a home equity loan?
A. Its columns grow rows.
This week, we see what happens when a new family moves in to an identical house to Sal's, right next door. The new neighbors, the Joneses, pay 1.5M for the house and Sal gets excited because it means he can revalue his asset.
The new neighbors also buy a new Hummer and go on an expensive vacation.
Sal wants to keep up with the Joneses, so Sal takes a year-long $100k vacation. To pay for it, he takes out a home equity loan against his newfound revaluation.
The bank is happy to lend him money (The video example is from 2006 when lending was looser) as long as he has 25% equity. They are willing to lend him 75% of the value the house:
(.75 x $1.5M = 1.075m), or, $325k in addition to his original mortgage ($750k).
Sal has never seen this much money before, and he wants it.
What does his balance sheet look like?
Liabilities: $1.075M
Orig mort: $750k
Equity loan: $325k
-------------
Assets: $1.825M
$1.5 mil. (house)
$325k cash (equity loan)
---------------
Equity: $750k
In order to pay for his $100k vacation, he must draw on his equity.
Taking $100k from one side of the ledger, means that his balance sheet is out of balance. Sal's consumption needs to come from his equity because the bank still wants to be paid back the same amount of money that they lent him, and the house hasn't changed in value, yet.
His new equity is $650k and both sides of the sheet balance again.
This video comes from www.khanacademy.org
Ed's Note: This video was recorded in 2006, before the huge economic crash
posted in: Blogs, business, diy mba
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Comments (2)
http://www.american-apartment-owners-association.org/eviction/
Posted: 8:16 am on January 6th
One reason existing refinancing efforts have fallen far short of their goals is that Fannie and Freddie continue to charge homeowners high, risk-based fees up front to refinance their loans you can avoid this if you check your rates and fees at 123 Refinance before you sign
Posted: 3:58 am on November 14th
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