Refinancing Options: When market interest rates drop, borrowers in both the U.S. and Denmark can refinance at par to lower their interest rate. When market interest rates rise, however, only borrowers in Denmark can refinance at the lower market price. Borrowers in the U.S. must pay off their old loan at par.
For example, John Doe has a $200,000 balance on his 5% mortgage and he expects to sell his house for $250,000 in a market in which home buyers pay 5%. But before he can sell, market rates jump from 5% to 7.5% and potential buyers can now only afford to pay $200,000, wiping out Doeâs home equity. However, because of the rate increase, the market price of Doeâs 5% mortgage has dropped from 100 to 90. If Doe is a Dane, he can refinance into a 7.5% loan by paying $180,000 to retire his old loan; by so-doing, he retains a piece of his equity. If Doe is from the U.S., he must pay $200,000 to retire his existing loan.
Quote from Martinghoul:
What happens to a bond when yields go up? Each Danish mtge is an actual bond, with its own ISIN and its own mkt price.
It's the oldest mtge mkt in the world and it's been working quite well for arnd 300 years now. The Danes have good cause to be proud of what they have.
Yep, kind of... As a borrower, you make payments that are based on the coupon. The other important aspect of the system is the way the mtge institutes (they're dedicated mtge banks) are structured and regulated. There's quite a bit of info on the web about the key tenets.Quote from subban:
I see, its basically like owning a corporate bond. except the homeowner acts as the corporate borrower making payments based on the difference between coupon and market rates.
Good question... Off the top of my head, I really can't think of any aspect where the Danish system could be considered inferior to what is practiced in the US.Quote from SomeYoungGuy:
So it's completely different from what we have in the US then. What's the downside?