5 ms·
> if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I
by bko 5y ago
> if you take out a $1m loan and then interest rates go up, you're still liable for the whole $1m even though your actual asset might only be worth $900k now. I think this is one of the big dangers of having an essential need like housing cost such a large multiple of income.
You could always walk away. Better to be under water on a mortgage than own it outright. This is called a strategic default. Lenders know this which is why they require a substantial down payment (typically 20% in the US)
Most people wouldn't do it if they're slightly under water. But eventually many people would consider walking away and taking a hit on their credit score, which get totally wiped out after 7 years anyway.
- RayVR 5y agoThis is only true in states with non-recourse loans. Many states have full recourse home loans that would require the homeowners declare bankruptcy to "walk away"
- TedDoesntTalk 5y agoYeah, and I don’t think bankruptcy disappears from your credit report after 7 years like other items. Does it?
- yurishimo 5y agoBankruptcy does eventually disappear I think, or if it doesn't there are legal requirements not to hold it against you after X years without a problem on your end. It's been a while since I've looked into it.
- ncphil 5y agoThe irony, of course, is that the US Bankruptcy Code provides you can't declare bankruptcy again until 7 years have passed. So creditors theoretically have less risk during the period they generally refuse credit to the newly bankrupt. Of course none of that applies to business bankruptcy, where the old company is often dissolved but you're often looking to the same former principal(s) for personal guarantees of the new company's obligations.
- sokoloff 5y agoThere are a number of lenders who are willing to extend credit to those with a discharged bankruptcy (on terms far worse than someone with an 810 credit score, of course).
- addaon 5y ago7 years (Chapter 13) or 10 years (Chapter 7).[1] [1] https://www.lexingtonlaw.com/education/how-to-remove-bankruptcy https://www.lexingtonlaw.com/education/how-to-remove-bankrup...
- ryathal 5y agoBeing underwater is only a problem if you want/need to sell. Choosing foreclosure is a bad move, not having a choice is different.