How does a refinance allow a mortgage to be repaid?What do banks do with “Repaid Principal”?What's the term for consumers not being able to pay their mortgage?Literature Request: how does the house quality distribution change endogenously over time?Conforming mortgage loan limits by county and yearHow does the fractional reserve banking system work?How much do real-estate prices correlate with apartment rental prices?Authoritative Books on Subprime Mortgage CrisisHow are fund managers usually compensated against benchmark?How does hedging using futures work?Should housing be considered a form of capital for the purpose of capital gains taxation?
How to Prove P(a) → ∀x(P(x) ∨ ¬(x = a)) using Natural Deduction
How badly should I try to prevent a user from XSSing themselves?
Are British MPs missing the point, with these 'Indicative Votes'?
Does int main() need a declaration on C++?
What's the meaning of "Sollensaussagen"?
What is required to make GPS signals available indoors?
What is an equivalently powerful replacement spell for the Yuan-Ti's Suggestion spell?
Can compressed videos be decoded back to their uncompresed original format?
How can saying a song's name be a copyright violation?
What do you call someone who asks many questions?
Placement of More Information/Help Icon button for Radio Buttons
Notepad++ delete until colon for every line with replace all
Knowledge-based authentication using Domain-driven Design in C#
Is it possible to map the firing of neurons in the human brain so as to stimulate artificial memories in someone else?
Do creatures with a listed speed of "0 ft., fly 30 ft. (hover)" ever touch the ground?
If a warlock makes a Dancing Sword their pact weapon, is there a way to prevent it from disappearing if it's farther away for more than a minute?
How can a day be of 24 hours?
How do I exit BASH while loop using modulus operator?
What reasons are there for a Capitalist to oppose a 100% inheritance tax?
How to show a landlord what we have in savings?
Rotate ASCII Art by 45 Degrees
Why was Sir Cadogan fired?
What is a Samsaran Word™?
Implication of namely
How does a refinance allow a mortgage to be repaid?
What do banks do with “Repaid Principal”?What's the term for consumers not being able to pay their mortgage?Literature Request: how does the house quality distribution change endogenously over time?Conforming mortgage loan limits by county and yearHow does the fractional reserve banking system work?How much do real-estate prices correlate with apartment rental prices?Authoritative Books on Subprime Mortgage CrisisHow are fund managers usually compensated against benchmark?How does hedging using futures work?Should housing be considered a form of capital for the purpose of capital gains taxation?
$begingroup$
A textbook I'm reading states (talking about the years leading up to the financial crisis):
As long as housing prices increased, these mortgages were secure: the
borrower
rapidly accumulated equity in the house that could be taken out in a refinance,
allowing the mortgage to be repaid.
How would this work exactly? I know that many people took out home equity loans, but I'm not exactly sure how accumulated equity would end up making liabilities easier to pay back.
finance housing
asked 5 hours ago
VastingVasting
275
$endgroup$
add a comment |
$begingroup$
A textbook I'm reading states (talking about the years leading up to the financial crisis):
As long as housing prices increased, these mortgages were secure: the
borrower
rapidly accumulated equity in the house that could be taken out in a refinance,
allowing the mortgage to be repaid.
How would this work exactly? I know that many people took out home equity loans, but I'm not exactly sure how accumulated equity would end up making liabilities easier to pay back.
finance housing
asked 5 hours ago
VastingVasting
275
$endgroup$
$begingroup$
What kind of mortgages are being referred to in the text? From the context, it sounds like subprime.
$endgroup$
– Brian Romanchuk
3 hours ago
add a comment |
$begingroup$
A textbook I'm reading states (talking about the years leading up to the financial crisis):
As long as housing prices increased, these mortgages were secure: the
borrower
rapidly accumulated equity in the house that could be taken out in a refinance,
allowing the mortgage to be repaid.
How would this work exactly? I know that many people took out home equity loans, but I'm not exactly sure how accumulated equity would end up making liabilities easier to pay back.
finance housing
asked 5 hours ago
VastingVasting
275
$endgroup$
A textbook I'm reading states (talking about the years leading up to the financial crisis):
As long as housing prices increased, these mortgages were secure: the
borrower
rapidly accumulated equity in the house that could be taken out in a refinance,
allowing the mortgage to be repaid.
How would this work exactly? I know that many people took out home equity loans, but I'm not exactly sure how accumulated equity would end up making liabilities easier to pay back.
finance housing
finance housing
asked 5 hours ago
VastingVasting
275
asked 5 hours ago
VastingVasting
275
asked 5 hours ago
VastingVasting
275
asked 5 hours ago
VastingVasting
275
asked 5 hours ago
VastingVasting
275
275
$begingroup$
What kind of mortgages are being referred to in the text? From the context, it sounds like subprime.
$endgroup$
– Brian Romanchuk
3 hours ago
add a comment |
$begingroup$
What kind of mortgages are being referred to in the text? From the context, it sounds like subprime.
$endgroup$
– Brian Romanchuk
3 hours ago
$begingroup$
What kind of mortgages are being referred to in the text? From the context, it sounds like subprime.
$endgroup$
– Brian Romanchuk
3 hours ago
$begingroup$
What kind of mortgages are being referred to in the text? From the context, it sounds like subprime.
$endgroup$
– Brian Romanchuk
3 hours ago
add a comment |
2 Answers
2
active
oldest
votes
$begingroup$
Say you buy a house for $100. This is paid with:
- A $10 down payment (from your own cash). (This is your equity.)
- A $90 loan from a bank at 10% annual interest. (We call this a mortgage loan or more simply a mortgage.)
Notice you're paying a relatively high interest rate of 10% on your mortgage, perhaps because the bank is not very confident that you'll be able to repay the loan.
Say that overnight, the value of the house rises by $50 to $150. Now your equity has also risen by $50, from $10 to $60. You can now refinance your mortgage and ask the bank to lower the interest rate on your loan, say to 5%. You are certainly happy to do this refinancing because you'll pay a lower interest rate. And the bank might be willing to oblige because it is now more confident that you'll repay the loan.
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
$endgroup$
add a comment |
$begingroup$
Let's say that you have a house that you buy for $P$ dollars. You have a mortgage of $M$ dollars. There is a change in the price of housing of $r$ percent. Assuming no transaction costs, the home owner's equity, the value of the house after selling it and repaying the mortgage is then:
$$ max[(1+r)cdot P - M, 0]$$
because if the mortgage is worth more than the house they can default, and this option makes it so the household has equity of at least zero. There is a second reason a household might default, that they are unable to pay their mortgage. The first reason is called strategic default and the second non-strategic default. In good times, when $r$ is positive, the household has positive home equity and no reason for strategic default. If they are unable to make their mortgage payments (non-strategic default), they can sell their house. This allows them to pocket their home equity, protect their credit, and repay their loan.
In reality, there are complications. The lasting damage to credit scores of a default, the possibility of recourse on a mortgage, losses in house value from foreclosure, and transaction costs all complicate this picture some. But the general idea still holds. Rising house prices give households with cash flow problems the ability to sell their houses rather than default. So the strategic defaulters have no reason to default and the non-strategic defaulters can sell instead of default. This lowers default risk substantially.
answered 4 hours ago
BKayBKay
12.3k22458
$endgroup$
add a comment |
Your Answer
StackExchange.ifUsing("editor", function ()
return StackExchange.using("mathjaxEditing", function ()
StackExchange.MarkdownEditor.creationCallbacks.add(function (editor, postfix)
StackExchange.mathjaxEditing.prepareWmdForMathJax(editor, postfix, [["$", "$"], ["\\(","\\)"]]);
);
);
, "mathjax-editing");
StackExchange.ready(function()
var channelOptions =
tags: "".split(" "),
id: "591"
;
initTagRenderer("".split(" "), "".split(" "), channelOptions);
StackExchange.using("externalEditor", function()
// Have to fire editor after snippets, if snippets enabled
if (StackExchange.settings.snippets.snippetsEnabled)
StackExchange.using("snippets", function()
createEditor();
);
else
createEditor();
);
function createEditor()
StackExchange.prepareEditor(
heartbeatType: 'answer',
autoActivateHeartbeat: false,
convertImagesToLinks: false,
noModals: true,
showLowRepImageUploadWarning: true,
reputationToPostImages: null,
bindNavPrevention: true,
postfix: "",
imageUploader:
brandingHtml: "Powered by u003ca class="icon-imgur-white" href="https://imgur.com/"u003eu003c/au003e",
contentPolicyHtml: "User contributions licensed under u003ca href="https://creativecommons.org/licenses/by-sa/3.0/"u003ecc by-sa 3.0 with attribution requiredu003c/au003e u003ca href="https://stackoverflow.com/legal/content-policy"u003e(content policy)u003c/au003e",
allowUrls: true
,
noCode: true, onDemand: true,
discardSelector: ".discard-answer"
,immediatelyShowMarkdownHelp:true
);
);
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
var $window = $(window),
onScroll = function(e)
var $elem = $('.new-login-left'),
docViewTop = $window.scrollTop(),
docViewBottom = docViewTop + $window.height(),
elemTop = $elem.offset().top,
elemBottom = elemTop + $elem.height();
if ((docViewTop elemBottom))
StackExchange.using('gps', function() StackExchange.gps.track('embedded_signup_form.view', location: 'question_page' ); );
$window.unbind('scroll', onScroll);
;
$window.on('scroll', onScroll);
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function ()
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2feconomics.stackexchange.com%2fquestions%2f27600%2fhow-does-a-refinance-allow-a-mortgage-to-be-repaid%23new-answer', 'question_page');
);
Post as a guest
Required, but never shown
2 Answers
2
active
oldest
votes
2 Answers
2
active
oldest
votes
active
oldest
votes
active
oldest
votes
$begingroup$
Say you buy a house for $100. This is paid with:
- A $10 down payment (from your own cash). (This is your equity.)
- A $90 loan from a bank at 10% annual interest. (We call this a mortgage loan or more simply a mortgage.)
Notice you're paying a relatively high interest rate of 10% on your mortgage, perhaps because the bank is not very confident that you'll be able to repay the loan.
Say that overnight, the value of the house rises by $50 to $150. Now your equity has also risen by $50, from $10 to $60. You can now refinance your mortgage and ask the bank to lower the interest rate on your loan, say to 5%. You are certainly happy to do this refinancing because you'll pay a lower interest rate. And the bank might be willing to oblige because it is now more confident that you'll repay the loan.
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
$endgroup$
add a comment |
$begingroup$
Say you buy a house for $100. This is paid with:
- A $10 down payment (from your own cash). (This is your equity.)
- A $90 loan from a bank at 10% annual interest. (We call this a mortgage loan or more simply a mortgage.)
Notice you're paying a relatively high interest rate of 10% on your mortgage, perhaps because the bank is not very confident that you'll be able to repay the loan.
Say that overnight, the value of the house rises by $50 to $150. Now your equity has also risen by $50, from $10 to $60. You can now refinance your mortgage and ask the bank to lower the interest rate on your loan, say to 5%. You are certainly happy to do this refinancing because you'll pay a lower interest rate. And the bank might be willing to oblige because it is now more confident that you'll repay the loan.
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
$endgroup$
add a comment |
$begingroup$
Say you buy a house for $100. This is paid with:
- A $10 down payment (from your own cash). (This is your equity.)
- A $90 loan from a bank at 10% annual interest. (We call this a mortgage loan or more simply a mortgage.)
Notice you're paying a relatively high interest rate of 10% on your mortgage, perhaps because the bank is not very confident that you'll be able to repay the loan.
Say that overnight, the value of the house rises by $50 to $150. Now your equity has also risen by $50, from $10 to $60. You can now refinance your mortgage and ask the bank to lower the interest rate on your loan, say to 5%. You are certainly happy to do this refinancing because you'll pay a lower interest rate. And the bank might be willing to oblige because it is now more confident that you'll repay the loan.
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
$endgroup$
Say you buy a house for $100. This is paid with:
- A $10 down payment (from your own cash). (This is your equity.)
- A $90 loan from a bank at 10% annual interest. (We call this a mortgage loan or more simply a mortgage.)
Notice you're paying a relatively high interest rate of 10% on your mortgage, perhaps because the bank is not very confident that you'll be able to repay the loan.
Say that overnight, the value of the house rises by $50 to $150. Now your equity has also risen by $50, from $10 to $60. You can now refinance your mortgage and ask the bank to lower the interest rate on your loan, say to 5%. You are certainly happy to do this refinancing because you'll pay a lower interest rate. And the bank might be willing to oblige because it is now more confident that you'll repay the loan.
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
edited 2 hours ago
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
answered 2 hours ago
Kenny LJKenny LJ
6,06321945
6,06321945
add a comment |
add a comment |
$begingroup$
Let's say that you have a house that you buy for $P$ dollars. You have a mortgage of $M$ dollars. There is a change in the price of housing of $r$ percent. Assuming no transaction costs, the home owner's equity, the value of the house after selling it and repaying the mortgage is then:
$$ max[(1+r)cdot P - M, 0]$$
because if the mortgage is worth more than the house they can default, and this option makes it so the household has equity of at least zero. There is a second reason a household might default, that they are unable to pay their mortgage. The first reason is called strategic default and the second non-strategic default. In good times, when $r$ is positive, the household has positive home equity and no reason for strategic default. If they are unable to make their mortgage payments (non-strategic default), they can sell their house. This allows them to pocket their home equity, protect their credit, and repay their loan.
In reality, there are complications. The lasting damage to credit scores of a default, the possibility of recourse on a mortgage, losses in house value from foreclosure, and transaction costs all complicate this picture some. But the general idea still holds. Rising house prices give households with cash flow problems the ability to sell their houses rather than default. So the strategic defaulters have no reason to default and the non-strategic defaulters can sell instead of default. This lowers default risk substantially.
answered 4 hours ago
BKayBKay
12.3k22458
$endgroup$
add a comment |
$begingroup$
Let's say that you have a house that you buy for $P$ dollars. You have a mortgage of $M$ dollars. There is a change in the price of housing of $r$ percent. Assuming no transaction costs, the home owner's equity, the value of the house after selling it and repaying the mortgage is then:
$$ max[(1+r)cdot P - M, 0]$$
because if the mortgage is worth more than the house they can default, and this option makes it so the household has equity of at least zero. There is a second reason a household might default, that they are unable to pay their mortgage. The first reason is called strategic default and the second non-strategic default. In good times, when $r$ is positive, the household has positive home equity and no reason for strategic default. If they are unable to make their mortgage payments (non-strategic default), they can sell their house. This allows them to pocket their home equity, protect their credit, and repay their loan.
In reality, there are complications. The lasting damage to credit scores of a default, the possibility of recourse on a mortgage, losses in house value from foreclosure, and transaction costs all complicate this picture some. But the general idea still holds. Rising house prices give households with cash flow problems the ability to sell their houses rather than default. So the strategic defaulters have no reason to default and the non-strategic defaulters can sell instead of default. This lowers default risk substantially.
answered 4 hours ago
BKayBKay
12.3k22458
$endgroup$
add a comment |
$begingroup$
Let's say that you have a house that you buy for $P$ dollars. You have a mortgage of $M$ dollars. There is a change in the price of housing of $r$ percent. Assuming no transaction costs, the home owner's equity, the value of the house after selling it and repaying the mortgage is then:
$$ max[(1+r)cdot P - M, 0]$$
because if the mortgage is worth more than the house they can default, and this option makes it so the household has equity of at least zero. There is a second reason a household might default, that they are unable to pay their mortgage. The first reason is called strategic default and the second non-strategic default. In good times, when $r$ is positive, the household has positive home equity and no reason for strategic default. If they are unable to make their mortgage payments (non-strategic default), they can sell their house. This allows them to pocket their home equity, protect their credit, and repay their loan.
In reality, there are complications. The lasting damage to credit scores of a default, the possibility of recourse on a mortgage, losses in house value from foreclosure, and transaction costs all complicate this picture some. But the general idea still holds. Rising house prices give households with cash flow problems the ability to sell their houses rather than default. So the strategic defaulters have no reason to default and the non-strategic defaulters can sell instead of default. This lowers default risk substantially.
answered 4 hours ago
BKayBKay
12.3k22458
$endgroup$
Let's say that you have a house that you buy for $P$ dollars. You have a mortgage of $M$ dollars. There is a change in the price of housing of $r$ percent. Assuming no transaction costs, the home owner's equity, the value of the house after selling it and repaying the mortgage is then:
$$ max[(1+r)cdot P - M, 0]$$
because if the mortgage is worth more than the house they can default, and this option makes it so the household has equity of at least zero. There is a second reason a household might default, that they are unable to pay their mortgage. The first reason is called strategic default and the second non-strategic default. In good times, when $r$ is positive, the household has positive home equity and no reason for strategic default. If they are unable to make their mortgage payments (non-strategic default), they can sell their house. This allows them to pocket their home equity, protect their credit, and repay their loan.
In reality, there are complications. The lasting damage to credit scores of a default, the possibility of recourse on a mortgage, losses in house value from foreclosure, and transaction costs all complicate this picture some. But the general idea still holds. Rising house prices give households with cash flow problems the ability to sell their houses rather than default. So the strategic defaulters have no reason to default and the non-strategic defaulters can sell instead of default. This lowers default risk substantially.
answered 4 hours ago
BKayBKay
12.3k22458
edited 2 hours ago
answered 4 hours ago
BKayBKay
12.3k22458
answered 4 hours ago
BKayBKay
12.3k22458
answered 4 hours ago
BKayBKay
12.3k22458
12.3k22458
add a comment |
add a comment |
Thanks for contributing an answer to Economics Stack Exchange!
- Please be sure to answer the question. Provide details and share your research!
But avoid …
- Asking for help, clarification, or responding to other answers.
- Making statements based on opinion; back them up with references or personal experience.
Use MathJax to format equations. MathJax reference.
To learn more, see our tips on writing great answers.
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
var $window = $(window),
onScroll = function(e)
var $elem = $('.new-login-left'),
docViewTop = $window.scrollTop(),
docViewBottom = docViewTop + $window.height(),
elemTop = $elem.offset().top,
elemBottom = elemTop + $elem.height();
if ((docViewTop elemBottom))
StackExchange.using('gps', function() StackExchange.gps.track('embedded_signup_form.view', location: 'question_page' ); );
$window.unbind('scroll', onScroll);
;
$window.on('scroll', onScroll);
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
StackExchange.ready(
function ()
StackExchange.openid.initPostLogin('.new-post-login', 'https%3a%2f%2feconomics.stackexchange.com%2fquestions%2f27600%2fhow-does-a-refinance-allow-a-mortgage-to-be-repaid%23new-answer', 'question_page');
);
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
var $window = $(window),
onScroll = function(e)
var $elem = $('.new-login-left'),
docViewTop = $window.scrollTop(),
docViewBottom = docViewTop + $window.height(),
elemTop = $elem.offset().top,
elemBottom = elemTop + $elem.height();
if ((docViewTop elemBottom))
StackExchange.using('gps', function() StackExchange.gps.track('embedded_signup_form.view', location: 'question_page' ); );
$window.unbind('scroll', onScroll);
;
$window.on('scroll', onScroll);
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
var $window = $(window),
onScroll = function(e)
var $elem = $('.new-login-left'),
docViewTop = $window.scrollTop(),
docViewBottom = docViewTop + $window.height(),
elemTop = $elem.offset().top,
elemBottom = elemTop + $elem.height();
if ((docViewTop elemBottom))
StackExchange.using('gps', function() StackExchange.gps.track('embedded_signup_form.view', location: 'question_page' ); );
$window.unbind('scroll', onScroll);
;
$window.on('scroll', onScroll);
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Sign up or log in
StackExchange.ready(function ()
StackExchange.helpers.onClickDraftSave('#login-link');
var $window = $(window),
onScroll = function(e)
var $elem = $('.new-login-left'),
docViewTop = $window.scrollTop(),
docViewBottom = docViewTop + $window.height(),
elemTop = $elem.offset().top,
elemBottom = elemTop + $elem.height();
if ((docViewTop elemBottom))
StackExchange.using('gps', function() StackExchange.gps.track('embedded_signup_form.view', location: 'question_page' ); );
$window.unbind('scroll', onScroll);
;
$window.on('scroll', onScroll);
);
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Sign up using Google
Sign up using Facebook
Sign up using Email and Password
Post as a guest
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
Required, but never shown
$begingroup$
What kind of mortgages are being referred to in the text? From the context, it sounds like subprime.
$endgroup$
– Brian Romanchuk
3 hours ago