Does Appreciation Add to Equity in a Refinance?

7 Replies

Let's say I buy a home for 100k with a 20k down payment. A year later that same home is now worth 150k and I have since put 10k into the principle on the loan.

Would I now have 80k in equity?

If i refinanced, would i be able to pull that 80k out?

Or if I just refinanced into another conventional loan just with a lower interest rate, would that 80k go towards the refinance or strictly what i have actually paid to the home?

Basically am I refinancing with 80k or 30k?

In theory yes.  It will come down to what your bank is willing to loan on.  They may wonder how a home worth $100k is now worth $150k in just a year.  50% appreciation seems a little far fetched.  Are you getting your valuation from Zillow?

The second part of your question is a little confusing.  If you do a no money out refi just to get a lower interest rate then the appreciation doesn't "go" anywhere.  You simply have $80k in debt owed against an asset that is worth $150k.

Be careful when you use equity to measure the value increase or profit gained.  Not all equity is a gain.  For instance, in your example, you gained $50k in 1 year (unlikely, but we'll play along) but the $10k wasn't a gain...it was just a transfer of funds from one resting place (your bank) to another (the floorboards of your house).  It's the same money.

@Jacob Sampson

Ok so basically I would start a new loan with all of my current equity as a down payment vs the current appraised value of the home?

That makes sense. Inwas wondering what would happen if I rehabed a property amd gained a value close to or over the amount i currently owed the bank. Would they turn around and owe me money lol?

I thank you gentlemen for entertaining my novice questions.

Originally posted by @Curtis Lewis :

@Joe Villeneuve

Thanks for the advice.

 In addition, while that money was in your bank, it was free for you to use again...at any moment, without approval...or cost.  Not so when you move that sme money into the equity of this property.  It's the same value as when it was cash in your bank going in, but it's less value when it reaches the floorboards of your property since you need to buy it back, with approvals, to use it again.

@Curtis Lewis I used to do math they way you are trying to do it. But, I think it's best to do the math they way they lender will. 

Let's assume your house appraises for 150K (Like @Joe Villeneuve playing along). They will likely lend on 70-75 LTV or loan to value on a rental house. They will do higher LTVs on a primary residence. Let's assume a rental (the math is the same however for a primary res, just use a higher LTV). Note, LTV is just the difference of what they want as a down payment or kept in the loan as equity (your skin in the game). SO if LTV is .75 they want you to keep 25% of your money in the loan. Okay here the math:

150k x .75 = $105,000

So 105K is the max they'd give you in a new loan. Now you have to pay off your original loan. It looks like you have about 80K outstanding (assuming you haven't paid the loan down). In one year, at a reasonable interest rate, and a 30 year loan, you've paid your note down to about 78,500, via monthly payments

Subtract your 105K-78.5K to get what you could pull out. 

=26.5K returned to you.

So in theory you get all your money back (your original downpayment) and a little over half of your 10K in rehab costs. Assuming the house appraises for 150K.

Keep in mind, you've not calculated the costs to originate the refinance, appraisal, recording fees, etc (all the closing costs). So you'll not likely end up with 26.5K after cashout... probably 22-23K when you've paid for all your closing costs.

Feel free to PM me if you have questions or need help doing the math with more specific numbers.

Best, 

Andrew

If you purchased a house worth $50k as is and got a loan for $90k to both purchase and rehab the property and once done the property was worth $150k.  I think this is the scenario you outlined below.

The bank would no owe you anything you would simply have $90k in debt on an asset worth $150k or $60k in equity.  You could not get access to that equity unless you get a line of credit on the property, refied so that you had a larger loan on the asset, sold the property, or used the equity as a down payment on your next purchase by the bank cross-colateralizing(sp?) your properties.

In answer to the question in the title, yes.  Appreciation adds to equity, assuming you don't borrow against the equity.  If you borrow against the equity then your equity goes down and your debt and cash go up.

Originally posted by @Curtis Lewis :

@Jacob Sampson

Ok so basically I would start a new loan with all of my current equity as a down payment vs the current appraised value of the home?

That makes sense. Inwas wondering what would happen if I rehabed a property amd gained a value close to or over the amount i currently owed the bank. Would they turn around and owe me money lol?

I thank you gentlemen for entertaining my novice questions.