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In: refinancing
1 Feb 2010In many writeups on the current economic crisis that I’ve read, I frequently see reference to how homeowners, in a speculative bubble, assumed that their real estate values would go up, after which they would refinance, and reap some benefit, etc. I’m looking for an explanation of how rising prices would enable refinancing, and then, what benefit would be gained by doing so. Thanks.
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3 Responses to How did homeowners take advantage of rising housing prices by refinancing?
Jay S
February 1st, 2010 at 6:19 pm
The only benefit to a refi that I can think of would be lower rates where you have more equity in the house. The lower the CLTV, the lower the rate. But that really wouldn’t add up to big bucks, just a marginal savings.
Perhaps they planned to pull the equity out with the new loan, but then if they do that it’s in the balance.
Hmm, not sure.
Todd Jansens Monkey
February 1st, 2010 at 7:04 pm
After an economic bubble breaks, in this case houses, product value drops because there are no longer as many buyers.
And in the case of houses, the banking system relied heavily on the purchase of new homes. The more homes that sell the more loans are granted by banks.
A halt in home sales puts a dent in the bottom line of lenders. Therefore, the banking system keeps the lending rates low.
And, generally, banks become more eager to re-finance to home owners with good credit. (However, the current economic situation is kind of throwing a little bit of a wrench in the process.) But the more clients paying to a lending the institution, the better it is for that institution.
The benefit for the home owner is a lower interest rate on their home loan. And the additional benefit for the bank is a customer base that is more likely to make their payments.
And I’m not sure that that thoroughly answers your question. But there’s a little nugget for you.
Bob F
February 1st, 2010 at 7:21 pm
The price of property was going up. If your property appraised for more than you owed, then you could take out a loan on the difference between what you owed and the appraised value.
When the price of property started going down many homeowners discovered they owed more than the home was worth. Ouch!