Category: Reddit Post

Mortgage _ part 1 | Trading Academy

It’s all cyclical. Before the depression, mortgage lending was on the rise. The typical loan term ranged from 2 to 5 years, with the principal repayment due at the end. What does this mean? If you were buying a house in 1920, you would go to the bank, and they would grant you a loan. Typically, they would provide half the funds. So, for a house worth $10,000 (equivalent to about $200,000 today, a modest home), the bank would loan you $5,000. You would pay interest monthly, and at the end – after two or five years – you would pay back the $5,000. Then you could try to get another mortgage. You’d go back to the bank, and they’d give you another $5,000. This was the scheme; banks offered it to everyone, and it became widespread. You’d pay only interest each month, and suddenly you’d have to pay back the entire five grand after two years. But people thought nothing of it – after two years, they’d just go back to the bank, and if they refused, they’d try another bank. I mean, who couldn’t find another $5,000 somewhere? And it all worked without major issues. What happened during the Great Depression? Two things: unemployment soared to 25%, and home prices plummeted by more than half. For instance, if you borrowed $5,000 for a $10,000 home, and it dropped in value to just $4,000, after two years you’d go to the bank to refinance the loan. You’d say, “Well, I’m unemployed, and my house is now worth $4,000.” The bank would respond, “Sorry, we won’t lend to you anymore.” What happens next? You have to sell the house, you go bankrupt, everything is lost. You’ve already lost the initial down payment of $5,000, and you still owe money. submitted by /u/FXgram_ [link] [comments]