5 ms·

Isn't this basically an overdraft?

• bombcar 3y ago
  No, because the bank would always have recourse to something (the security). If you're limited to something the bank can take (and only that, excluding fraud, etc), the bank will self-regulate and not loan more than negotiable amount - cost of negotiating - this is where the 80% maximum normal home loan comes from. The bank (mostly) ignores the risk the value could go down, but understands that when all is said and done a foreclosure of a $100k house will net about $80k for the foreclosing entity. With this you can finagle yourself down to zero (own a home, take a mortgage for 80%, squander the money, get foreclosed, have nothing) - but if the bank will lend more based on being able to go after you for the difference (recourse) than you can finagle yourself down to negative amounts.