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When you have a 10% mortgage and interest rates drop to 2%, you refinance. You borrow a new loan at 2%, buy out your old 10% loan (so you never have to deal wit
by dragontamer 4y ago
When you have a 10% mortgage and interest rates drop to 2%, you refinance. You borrow a new loan at 2%, buy out your old 10% loan (so you never have to deal with 10% interest rate payments again).
If you have a 2% loan, and interest rates skyrocket to 10%, you absolutely do not sell your 2% loan to reup to 10%. That's just stupid. You keep the 2% loan and even try to slow down payments (if you were double-paying or otherwise cutting down principal before, you stop doing that).
- kgwgk 4y agoI understand the question to be whether you can liquidate a 2% 20-year loan paying fifty cents on the dollar or whatever the fair amount is. (I guess the answer is no for the usual US mortgages but it could be yes for some kind of loans.)
- mrfox321 4y agoI had a similar thought. It's equivalent to buying the bond that represents the debt you owe. Larger debt ends up in negotiations over the amount owed. War debt after WW1 resulted in greatly reduced repayments based on the original lending. If you are a default risk on debt that has weak collateral, you could probably come to some agreement that pays back some fraction of the principal.
- dragontamer 4y agoThe US Treasuries, like 10Y and 30Y, trade on the basis like you describe. All you gotta do is put a dollar value on it, which is actually relatively easy. Just calculate the approximate worth of 2033 dollars vs 2023 dollars, and adjust the prices today to match your expectations. There "is no risk" in US Treasuries because we're screwed if there are risks. (Aka, everyone ignores things like the Debt Ceiling debate).
- kgwgk 4y agoSure, but for many reasons (including taxes and other administrative issues) having two more-or-less-offsetting positions in completely different contexts is not the same as paying a debt.