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.
You’ll be $50k better off if you just stop paying and let the bank foreclose.
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?
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.
But what you’re saying is simply not true. Where I live you have to provide 20% of equity to get a mortgage but you can’t default when the prices go down. No bank offers mortgage covered in 100% by the house. If you owe the bank $600k you owe then $600k, that’s it. If you default and you’re house now only costs $500k you still owe them $100k.
So the 20% requirement has nothing to do with negative equity protections. It’s to limit the banks exposure in case you’re unable to pay.
I don’t know how this works in US but where I live when you owe bank money they will simply garnish your wages and benefits. No one is defaulting on their mortgage to save money. That’s just not a thing. I personally know people who were paying their mortgages for many many years even though their house was worth way less then the mortgage. You just suck it up and hope the price will eventually go up. If it doesn’t it’s still better then living on the street.
If you were in negative equity, you might choose to suck it up and pay.
Statistically however, borrowers are much more likely to default when they’re in negative equity, because quite obviously, there’s an incentive to declare bankruptcy.
If you owed a million dollars on a property that had been condemned and is only worth $50k, obviously you would declare bankruptcy. If the property was worth $400k you’d probably do the same. If the property was worth $800k you might do that, but you might choose to suck it up.
My point is, negative equity is an incentive to default on the loan.
Obviously, defaulting on mortgages is a thing. Obviously, people are much more likely to do so when they’re in negative equity.
This isn’t something people do as a sophisticated well planned financial strategy. In a context of economic upheaval, declining property losses, usually because of unemployment, which usually causes family breakdowns.
In USA. As I explained in Europe it’s not a thing. Own contribution is a thing in USA and Europe. Therefore, banks don’t require own contribution because of defaults. Q.E.D.
That may work for some minimum wage jobs. No serious company is going to pay you under the counter. At least not in Europe. I’m not even sure what are you suggesting. You clearly don’t know how any of this works in Europe.
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.
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.
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?
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.
But what you’re saying is simply not true. Where I live you have to provide 20% of equity to get a mortgage but you can’t default when the prices go down. No bank offers mortgage covered in 100% by the house. If you owe the bank $600k you owe then $600k, that’s it. If you default and you’re house now only costs $500k you still owe them $100k.
So the 20% requirement has nothing to do with negative equity protections. It’s to limit the banks exposure in case you’re unable to pay.
Sorry chief, you’re just not picking up what I’m laying down.
Of course you still owe the money, you’re just much less likely to pay.
I don’t know how this works in US but where I live when you owe bank money they will simply garnish your wages and benefits. No one is defaulting on their mortgage to save money. That’s just not a thing. I personally know people who were paying their mortgages for many many years even though their house was worth way less then the mortgage. You just suck it up and hope the price will eventually go up. If it doesn’t it’s still better then living on the street.
If you were in negative equity, you might choose to suck it up and pay.
Statistically however, borrowers are much more likely to default when they’re in negative equity, because quite obviously, there’s an incentive to declare bankruptcy.
If you owed a million dollars on a property that had been condemned and is only worth $50k, obviously you would declare bankruptcy. If the property was worth $400k you’d probably do the same. If the property was worth $800k you might do that, but you might choose to suck it up.
My point is, negative equity is an incentive to default on the loan.
Obviously, defaulting on mortgages is a thing. Obviously, people are much more likely to do so when they’re in negative equity.
This isn’t something people do as a sophisticated well planned financial strategy. In a context of economic upheaval, declining property losses, usually because of unemployment, which usually causes family breakdowns.
In USA. As I explained in Europe it’s not a thing. Own contribution is a thing in USA and Europe. Therefore, banks don’t require own contribution because of defaults. Q.E.D.
clearly you’ve never heard of under the counter income
That may work for some minimum wage jobs. No serious company is going to pay you under the counter. At least not in Europe. I’m not even sure what are you suggesting. You clearly don’t know how any of this works in Europe.