Home equity greater than mortgage principal ... now what?

We bought a “fixer-upper” a couple of years ago. It was pre-foreclosure, and came at a significant discount … in large part because it was such a wreck. We have since put roughly the same amount of $ into renovating it as the value of the original mortgage.

If, for simplicity’s sake, we owed $100,000 on the original mortgage and after our renovations the house was assessed at $200,000 … what can we do with that increase in value? Can we somehow use it to pay off the original mortgage?

Sure - but you’d have to take a loan out with the equity in your house as collateral, and you’d end up with…another mortgage.

Maybe you have PMI on your original mortgage, and you can refinance and get rid of it?

Normally you’d get the money out by selling the property - you sell for $200k, pay off the remaining balance of the mortgage and walk away with $100k+ in cash profit.

I don’t know if they exist everywhere, but here in the UK there are also equity release schemes - basically a company buys your house from you (at less than the market value) and lets you continue living there for the rest of your life, then they own the house - essentially you get to spend your own estate instead of your heirs inheriting it. Such schemes usually target older people and I imagine the differential between market price and their payment is probably weighted by their assessment of how much longer you have to live.

My lender told us that the rate they offered was in part a function of percent of value. Which I took to understand that an $80k loan on a $200k house would have a lower rate than an $80k loan on a $100k house. But I’m not super confident in my interpretation.

If correct, that may make refinancing worth looking into.

Which may still be worth doing it, if the terms of the first mortgage allow early repayment. There’s a chance the interest rate on a new mortgage could be lower - first, because the general interest rate level on the market might have decreased since the first mortgage was taken out, and second, since the loan-to-value ratio of the first mortgage was likely higher than it would be now, with the house being worth more. So from the bank’s perspective the risk with a second mortgage is lower, and that lower risk may translate to a lower interest rate.

Although you can pay off the original mortgage, there wouldn’t be a point since you’d still owe $100k from the 2nd loan you used to pay off the mortgage. One option is to get a Home Equity Line of Credit (HELOC). That’s like having a credit line based around how much equity you have in your house. It can be useful in cases where you have some large expenses and can use the HELOC as a way to pay for them. But the downside is that if you default on the HELOC, they can take your house since that’s the collateral.

In general, you shouldn’t really look at the equity as free or easy money. By tapping into it, you are risking the security of your house. Also, it’s a good way to get yourself into a quantity of debt that can bring on a lot of problems. It’s sort of what happened back in the 2008 crash. People took out loans from their equity to spend on vacations, cars, 2nd houses, boats, etc., but then the housing market crashed and they couldn’t pay the loans back and they couldn’t sell their house. So unless you have a very good reason and significant need for that equity, don’t do anything with it.

Yeah, we were more interested in wiping out the mortgage than having access to money ASAP.

Yes, we’re looking into that, as well (it’s damned hard to get bankers on the line during COVID/PPP times), since interest rates are so low.

The one thing you do want to do is get the house reappraised and get rid of any PMI (Private Mortgage Insurance) you have on your original loan. You can usually do this without refinancing - and its cheaper to do it that way since refinancing will cost you a couple thousand out of pocket (or rolled back into the mortgage), getting rid of PMI will only cost you the appraisal fee. If you do refinance, make sure the lower interest rate pays you back quick enough for the cost of refinancing.

That $100,000 equity you’ve got your eye on is only cash to spend on your existing debt if you (a) sell the house, or (b), raise a loan against it, which is the opposite of what you’re asking. The earlier suggestions around looking to remortgage to get a better deal on the $100,000 you’ve borrowed is a good one though. I’ve got better and better deals as my equity share has increased.

Yes, Tom Selleck (Magnum PI) is on TV ad nauseum pushing “reverse mortgage” - “it’s not a trick, it’s not a way to steal your house, it’s just a loan,” which is essentially the same thing as the equity release scheme. For older folks, they mortgage your house and give you the mortgage money, and it’s predicated on life-insurance stats about how many years before you no longer need your home for one reason or another.

Your choices are fairly simple -
Second mortgage is simplest, likely has higher interest rate. If you are in the USA, they (foolishly) allow mortgage interest deduction, sosome of your monthly obligation is tax-deductible.

Remortgage the entire mortgage and pocket the difference. Other than crashing the world economy, what could possibly go wrong with that approach?

HELOC- on top of existing mortgage; this is what we have (although thanks to recent lack of travel opportunities, it’s at zero now.) It can top up at 75% of the value of the house, so in your case the remaining $50,000.
The “Line of Credit” advantage is there is no obligation to pay more than the interest (if even that) each month unless you max this out. If you just want access to cash from time to time (vacation, new boat) and pay it down this is ideal. If you are the sort that maxes out your credit cards and never gets them below that, why give yourself a $50,000 additional burden?

Not sure how mortgage insurance works in the rest of the world. AFAIK (been a while) in Canada its paid up front, and if you have more than 25% equity, is not needed.

Any changes to the mortgage banking on the extra value of the house will of course require an independent market assessment valuation of you new improved house.

Should also point out you may need to do a new assessment and update your insurance. Most homeowners may need to do this regularly depending on how much construction costs in your region have increased since the house was last assessed and particularly if your house has been improved bigly. Also, most banks require insurance coverage that matches mortgage.

But basically, you have a $200,000 house that you owe $100,000 on. (Minus what you’ve paid off so far?) if you want cash to spend, You have to increase the mortgage one way or another and hence your monthly payment obligation will go up.

What you have is a loan for $100,000 and a house. The house isn’t worth anything until you sell it, so you can’t somehow pay off your mortgage and still keep the house unless you can just save $100,000 from your income, but that’s not using your equity, that’s just paying off your mortgage.

You can use increased value of your house to get a bigger mortgage and you can use a bigger mortgage to do things that might be financially beneficial. You could buy a rental property for example. Or you could buy another fixer upper, fix it up then sell it, rinse and repeat.

That’s what my Nephew The Builder is doing - he’s on his 3rd do-er upper now and well on his way to being mortgage free by age 35. Of course, he can do most of the work himself, so his only costs are materials and plant hire, but still.

Or you could just downsize to a $100k property and voila! Mortgage free.

Quick question— If I get an independent appraisal now, and then decide, based on the home’s value/avail rates & fees to refinance, is the bank likely to require (and charge me for) its own appraisal?

I’d call a mortgage broker at your bank and ask. Mine would take an appraisal from a licensed appraiser within six months of refi, but state laws and bank policies differ.

They are very likely to do so, and might be mandated by laws passed (or policies enacted by Fannie/Freddie) in the wake of the sub-prime mortgage crisis.

One cause of the collapse is thought to have been collusion between customers, appraisers, and in some cases the banks themselves, to enable high LTV loans by overassessing properties. I believe even the banks themselves have ceded some control over the appraisal process (specifically, that they have an appraiser randomly assigned to them versus them choosing their own).

On the flip side, a lot of mortgage refis these days don’t require any appraisal altogether, if they think the LTV is low enough based on some algorithm or other. It’s possible that might apply to PMI as well.

Bottom line is you definitely want to hold off on spending anything on an appraisal at this time.

I was going to mention this. Certainly approach your current mortgage servicer first and check what it’d take to remove PMI or ask other mortgage companies about refinancing before getting the appraisal done. When we refinanced into a loan that was roughly a quarter of what we’d paid for the house a year before they didn’t need an appraisal: it was just obvious that the house was worth more than the loan. Unclear if they’ll think its “obvious”, especially if the gain in potential value Is due to renovations outside of the public record (by “assessed” did you mean by the taxing authority?). But maybe appreciation in your area is enough to do the trick.

My family owns a RE appraisal firm. I appraised for 6 years. Collusion and Broker pressure are why I stopped appraising.

My brother now does mostly private, tax and forensic appraisals.

We had a drive by appraisal for our last refi. Apparently, they didn’t get out of the car. Just make sure the home/neighborhood isn’t trashed.