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the "protection" against negative equity is the down payment. negative equity only matters if incomes take a hit and sales are forced.
by lintiness 10y ago
the "protection" against negative equity is the down payment. negative equity only matters if incomes take a hit and sales are forced.
- n00b101 10y agoThe down payment is equity, it's not really the same as protection. Although the higher your down payment, the lower your leverage risk. Let's say you put $100k down to purchase a property for $500k (i.e. you borrow $400k). If the property value falls to $400k (20% drop), your entire equity is wiped out. If you sell the property, the proceeds go to the bank to pay back the loan, and you have lost 100% of your the original $100k down payment ... This is due to leverage. If the property value falls below $400k, then you are in a negative equity situation ... Get deep enough into negative equity and it becomes rational for some people to just default and "walk away."
- lintiness 10y agovery few non-recourse loans in the housing market these days. a 20% decline in housing prices, and there's limited - zero systemic risk (ie the banks via linked derivatives that the author's so worried about); only the owner loses.