Mortgage Equity Withdrawal (MEW)
What it is:
How it works/Example:
When a property is worth more than is owed on it, it has positive equity. If this occurs, the equity may in some cases be used as collateral for an MEW.
For example, suppose Bob has a $75,000 mortgage balance on his home. His home's market value is $120,000. Bob may be eligible to obtain an MEW up to $45,000 ($120,000 market value - $75,000 mortgage balance = $45,000 in equity). If Bob obtains an MEW of $10,000, the value of his equity is reduced from $45,000 to $35,000.
Why it matters:
MEWs can be used to withdraw cash from what is generally considered an illiquid asset. However, there is risk that the mortgaged property will decline in value once equity is withdrawn. Should this occur, it is possible that the balance on the mortgage could exceed the market value of the mortgaged property, known as being "underwater."