It’s a little nefarious
Comment on A conundrum
null_dot@lemmy.dbzer0.com 1 day ago
The deposit is not to prove you can make the repayments.
Housing markets do, occasionally, go backwards in value.
If you have a loan for a house which is more than the value of the house you would have an incentive to just stop paying.
Thats why the bank needs a buffer, in the form of a deposit. Its not really nefarious.
PeriodicallyPedantic@lemmy.ca 13 hours ago
you need to pay us interest because we’re taking the risk. Also you need to give us a down payment to offset our risk.
null_dot@lemmy.dbzer0.com 6 hours ago
Correct.
Less down payment means more risk and therefore more interest.
Its pretty simple really.
PeriodicallyPedantic@lemmy.ca 5 hours ago
But if you don’t pay, they get the house. There is no risk of loss, only risk of not maximizing profit.
null_dot@lemmy.dbzer0.com 3 hours ago
Foreclosing is a very expensive process.
If you borrow 100% of the purchase price and the bank has to foreclose they would incur a loss.
Rivalarrival@lemmy.today 1 day ago
The alternative is some variety of private mortgage insurance. The insurer bets that housing prices will rise, so that you won’t default. If you do default, they reimburse the lender on their losses associated with your default.
null_dot@lemmy.dbzer0.com 1 day ago
as in the subject of this post, yes.
Lumisal@lemmy.world 1 day ago
If the loan is fixed at an amount or matched to inflation, you’d still have to pay or lose the house.
That’s still a pretty bullshit excuse, because it’s not like all that money you’ve already spent on paying the house will magically come back to you, you’d still be homeless if you lose the house, and the bank would still have a house available for the market, even if it’s at a lower value than before.
kungen@feddit.nu 1 day ago
And if it gets so bad that the bank starts losing money… no worries, the government will simply bail them out like usual!
null_dot@lemmy.dbzer0.com 1 day ago
I’m not sure if you’ve really understood the dynamic.
Suppose you buy for $700k, pay off $50k, but then the market collapses and the property is only worth $600k.
You’ll be $50k better off if you just stop paying and let the bank foreclose.
ExLisper@lemmy.curiana.net 21 hours ago
And do what? Live under a bridge? You would still have to buy a new house. Are you going to find similar house at $600k easily? Are interest rates still low despite market collapse? Will banks lend you money if just foreclosed?
null_dot@lemmy.dbzer0.com 20 hours ago
Don’t be daft.
I’m not providing advice regarding what someone ought to do when they find themselves in negative equity.
I’m explaining the requirement for buyers to start with a reasonable amount of equity.
Once an owner falls into negative equity, they have an incentive to default on the loan. Yes there will be consequences, but the fact remains they will he weighing those consequences against the financial incentive to default.
The “better off” in my comment is an impartial objective calculation.
Dalvoron@lemmy.zip 22 hours ago
I seem to completely misunderstand the dynamic.
As I see it, you have paid $700k for the house with the bank’s money (in this thread there is no deposit), bought back some of the house from the bank with $50k of your own money and then lost the house so you’re out $50k with no house.
If the bank does pay out some of the value of the house to you based on equity, it’s just going to be a smaller amount than $50k since the value of the house is lower and part of your repayment went to interest so you don’t even get $50k worth of equity. This feels like a worse position to me.
null_dot@lemmy.dbzer0.com 22 hours ago
You’re overthinking it.
The loan history is not relevant. The $50k you paid is gone. Sunk costs fallacy and all that.
A mortgage isn’t a complicated shared equity situation.
You owe the bank $650k and if you don’t pay they will take the house worth $600k.
Obviously if you default there will be legal problems and you’re still on the hook for the last $50k and so on, but there’s no incentive to keep paying. Like if you declare bankruptcy then you don’t have to pay the $50k and you can start saving for a deposit on your next house for when the exclusion period expires.