Let’s say you can’t pay your mortgage anymore and you’re going to go live with your mom.
Scenario 1: The house is worth at least what you paid for it. You sell the house for at least what you paid. Pay off the bank. No big deal.
Scenario 2: The house is worth less, maybe much less. So what happens here? Do you tell the bank, “screw it. You appraised it. You sell it.”
Or, are you on the hook for the difference? Can they garnish your wages, or repo your car or something? Does that kill your credit or are you just walking away from a secured loan? Will it destroy your chances of ever buying again?
(by the way, this is concerning no one I know. I’m just curious.)
You owe every penny of the difference. If the mortgagee puts the place up for sale they will make no special efforts to obtain the best price because they will chase you for anything owing. That is why buyers love mortgagee sales.
Third option–You can negotiate with the bank for a “Short Sale.” They get all the proceeds for the sale and forgive you the rest. Easier than tracking you down and taking you to court to try and get to pay money for a property you don’t own anymore.
Depending on the conditions of the loan, you may actually owe a lot more than the house’s value.
IANAA but my brother is, this is what I understood of his explanations.
French-style: a portion from each month’s payment is interest; a portion eats away at the principal. You can put big chunks toward the principal and every time you do this, the interests get lower (to compensate for this, the bank may charge a commision on these principal-eating operations).
US-style, which Bro says he can’t understand how anybody would take unless there’s no other option available: all interest is calculated from the start. In some loans, even if you take chunks of principal, interest does not get recalculated. If you pay only what the bank says to pay, your first N payments are eating away only at the amount of interest you owe… you’re not touching the principal until you’ve already paid all the interest.
This second way of calculating loans can reaaaaaally screw you. Five minutes after taking the loan, you don’t owe the principal (in your example, the price of the house): you owe the principal PLUS all the interest. So if you sold the house for the same price you paid, you’d still have to give the bank all that calculated interest.
Bro says he’s not moving to the States even if they make him president of the World Bank, just because of that way of calculating loans.
I work in New Jersey Real Estate: The appraisal amount is determined by the costs of similar properties that have sold within the past six months. If someone bought high, then got a loan using the house as collateral, and then housing prices went down, when they try to sell it five years later, they could be in a real jam, as similar properties can now be selling for prices that are very less.
Short sales are usually negotiated by attorneys, as there are a lot of legal work involved in doing one.
My cousin and her husband stopped paying on their mortgage. The mortgage lender took them to court. They lost (as they should have). The house was to be sold via the sheriff’s office.
One day before the sheriff’s sale, my cousin and her husband filed for Chapter 13 bankruptcy. This put an immediate stop to the sheriff’s sale.
That was 3 months ago. They’re still living in the house. Rumor has it that they have fallen behind in their payments. Not sure what will happen now.
The sad thing is that her father (my uncle) cosigned the original mortgage, and was also dragged through the courts. He said cosigning their loan was the biggest mistake he ever made in his life.
The benefit of the “interest-only” repayment plan is twofold:
It gives you lower monthly payments in the early days of the loan. If you are taking a mortgage over 25yrs, it’s likely for many people that their salary will increase over time, meaning they are more able to pay off the capital without over-stretching financially.
It’s great for contract / freelance workers, who may not have a steady monthly income. By paying off the interest they benefit from lower monthly payments, and as-and-when they receive payment for their work (which may be quarterly etc) they can add this to a fund which accumulates until such time as it’s enough to pay off the capital.
The danger is that people are seduced by the low initial monthly rate, but do not make sufficient provision to accumulate the capital needed to pay off the loan at the end of the term.
Does this really happen? You buy a house for say 100 grand (assume 100% mortgage) and on the first day of moving in you now owe, say 250 grand (assuming 25 years of interest are assessed at 150 grand)?
Yep. I bought a car, then one year later I had to leave the US, and I found out that I owed not just the principal - but also all the interest I hadn’t paid yet.
I found someone to “take over” the car and payments. The dealer wanted several thousand just to take it back.
I can’t make my brain accept this! How would people ever manage to, say, move house 5 years into a mortgage? You’d have to be really damn sure you liked the area, given that you’re nailed to the ground for at least say 10 years until you’ve paid off the interest and can recoup the remainder from the house sale.
I don’t know who you’ve been dealing with, Nava, but I feel for you. Over the course of my life I’ve purchased four cars and three houses and NONE of them have been that way.
In each case the loans were traditional. That is, both the interest and principle are represented in each monthly payment. The ratio of the two changes over time as you pay down more of the principle. So at first you might only be paying a few dollars on the main amount but eventually that becomes a greater portion of the loan.
Bro needs to do some more reading. I’ve had and paid off several mortgages. I’ve paid every one of them off early. Never have I heard of such a mortgage system.
Generally, if you pay a mortgage off one year after you borrowed the money, you will have paid one year’s interest on the declining balance, plus the principal amount.
I think that Nava has stuck together a couple of ideas.
For a normal, fixed loan, if I buy a $100,000 home with a 6% interest rate, then the interest on the first year is $6000. Let’s say that’s divided equally across 12 months (100 per month). Then, if my first month’s payment is $1000, $500 of that goes to principal, and $500 goes to the interest payment.
After the first year, I owe $94000 on the house, and the interest is recalculated on that. (actually this happens month to month, but it’s not true at all that “you’re not touching the principal until you’ve already paid all the interest.”)
HOWEVER, there are such things as “interest only loans” where that first month’s payment would be $500 (keeps costs low) but I’m not paying into the principal. That’s what Nava’s brother is describing.
It’s not fair to call that American-style though. I’d call that “careless borrower during the housing boom style”. They exploded in popularity as housing prices exploded.
Maybe someone can answer this one, then. Can a person who is in default on their mortgage sell the place before the bank forecloses on it? This is just the situation I find myself in. I’ve entered into a contract to buy a house, with the closing scheduled for today. Last Friday, the seller’s agent informed me that the seller has not paid her mortgage payments for at least two months, and is currently attempting to negotiate a short sale with the mortgage lender. The seller and her agent are therefore asking for a delay on closing of the sale until these negotiations are completed. It is not sure at the moment that the bank will actually agree to the short sale, and may foreclose instead. It not not appear to me that the seller actually can go ahead with the transaction under these circumstances. Is that correct?
However, there are “negative amortization” loans and loans with early pre-payment penalties, but they’re not what Nava.
Neg-am loans are really just interest only loans where they introductory period allows you to pay less than the “real” interest. In that case, you would wind up owing more after a year of ownership than you did before you bought.
If you’re ever considering doing something like that, do yourself a favor and remain a renter.
I am not an attorney in your state or any other, but I have seen this situation. The short answer is “no, they can’t.” Unless the mortgage company agrees to a short sale, the seller cannot close if the balance of the proceeds from the sale won’t pay off the mortgage. If you don’t close, you can sue the seller for failing to close. Consult a real estate attorney in your state.
And that is a real shitty thing for a seller to do.
You may have signed such a weird agreement at Sleazy Sam’s Rollin’ Recks, but there is NO mainstream financing in the US that operates this way.
The dealer may have offered you less than what was owed on your car because of depreciation, damage while you owned it or many other factors, but I think you are mistaken that you were asked to pay future interest.
I’ve financed, maybe, 15-20 cars and trucks in my lifetime. I can only think of one that I didn’t pay off early. Never have I paid a dime in “future interest”.
What if the person walking away from the home has no assets, no job, has applied for disability, and declared bankruptcy within the past couple of years?