how does home price appreciation affect mortgage prepayments?

[jimjohn]

can someone plz explain the effect of houes price appreciation on mortgage prepayments? i know this is usually a factor in all prepayment models but i cant understand how. is it because when house prices are appreciating, there is more demand for housing and thus mortgage rates fall which results in more refinancing which results in higher prepayments? does that sound right? any other insight? thanks!

 

[ConvertArb]

dont have any real data in this but logic tells me:
if your house has appreciated, you are more likely to sell then sell to take a loss. it seems people are much better with hard assets then paper investments, b/c you usually see equities/bonds/pfds volume spike at near the bottom.

 

[ditchdigger2CFA]

jimjohn Wrote:
——————————————————-
> can someone plz explain the effect of houes price
> appreciation on mortgage prepayments? i know this
> is usually a factor in all prepayment models but i
> cant understand how. is it because when house
> prices are appreciating, there is more demand for
> housing and thus mortgage rates fall which results
> in more refinancing which results in higher
> prepayments? does that sound right? any other
> insight? thanks!
Think of it this way. If someone’s home appreciates, they may ‘trade up’ to a bigger home harnessing free equity. The trade up pays off the first mortgage and the homeowner assumes a new one. Likewise, in some cases this capital gain goes untaxed if it is a primary residence.

 

[bchad]

There are a number of ways that home price appreciation affects mortgages:
1) Rapidly appreciating prices can lead to house flipping, which means mortgages tend to be prepaid.
2) House price appreciation can lead to cash-out-refinancing, which increases prepayments.
3) There is a causally prior mechanism whereby low interest rates increase home prices and simultaneously create incentives to refinance.

 

[jimjohn]

thanks guys!
so i was just looking up “cash out refinancing”, and so it looks like this means refinancing but taking out a loan that is greater than the previous loan. can someone plz explain what the point of doing this would be? how does this liquefy equity? so if I have a house priced at 200,000. my original mortgage was 80,000 so my equity in the house was 120,000. now lets say i take out a new mortgage on the same house of 100,000. then i pay off the original mortgage with this. how does this benefit me?
also, how would home price appreciation lead to cash out refinancing?
thanks.

 

[bchad]

It benefits you because when you refinance, you are presented with a $100,000 check, which you use to pay off your $80,000 mortgage. You now have $20,000 to spend on big screen TVs, a “much deserved” vacation, and a big grill for your backyard. Woo hoo! You could also use it to pay off your credit cards, reducing your interest burden from the 10-20% you pay the credit card companies to the 4-8% you pay on your mortgage.
If your home price is increasing, and therefore your home equity, it is a useful way to turn that home equity into cash that you can use for other purposes. In theory, this could be good because it would allow you to rebalance and diversify your total assets. In practice, most people just think of it as free money (since otherwise their home price appreciation is just a paper profit that they can’t spend), which is where the expression “using a home as an ATM” comes in.
Of course, when home prices stop appreciating and go down, this can be really bad on the downside. People may still do a cash out refinance these days, but only if their loan to value ratio is waaay below 80%.

 

[jimjohn]

thanks!