Why is the APR not affected by the appreciation in the short term? And why does the appreciation matter in the long term?
The borrower has to pay back the lesser of the outstanding loan balance or the property value. On a short term the outstanding loan balance is always the limiting factor, thus the appreciation of the property doesn’t matter. On the longer term, when the appreciation of the property is low, the property value may become the limiting factor. In this case the borrower actually has to pay back less than the loan balance. Because the borrower got all the benefit of the loan, but has to pay back less than the loan balance (only the property value), the APR comes in lower. (As matter of fact, the assumption in this case is that the borrower will only pay back only 93% of the property value if the loan is “under water”, because it is assumed that there is a 7% transaction cost for listing and selling the property.) It is important to remember that the house is only the collateral. As long as the value of the collateral is higher than the value of the loan, it doesn’t matter how much higher it
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