Say a house that’s worth half a million is bought by its first owner; first owner paid all mortgage off at some point and sell it to the 2nd owner, assuming now the house is worth one million.
Assume the 2nd owner pays $200 000 as down payment and the rest in the form of mortgage. The first owner should walk away from the deal with at least half a million cash since it’s paid off. My question is where is that money from?
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The old owner gets $1M, paid by the bank who issued the mortgage to the new owner. The new owner pays $200k to the bank and pays them back $800k plus interest in a new mortgage.
If the mortgage wasn’t paid off by the old owner, that $1M would be used to pay the mortgage off. If your house is worth less than your outstanding mortgage, you are said to be “underwater” on your mortgage.
The bank is providing the funds for the second owner, paid to the previous owner, to complete the sale. The original owner gets paid the full amount of the sale immediately, and the second owner owes that bank.
The original owner gets $200,000 from the buyer and $800,000 from the buyer’s bank, less real estate commission, title fees, escrow fees, etc.
The First owner will walk away from the Sale with a full $1 Million. $200K from the Second owner directly and $800K from the Bank.
The Bank makes its money by charging interest on the loan, at 2.5% the Second owner will need to pay at least $20K each year to the bank to clear the interest. Any more paid towards the mortgage will reduce the loan amount (Repayment). Most mortgages require to have fully repaid the loan by the end so your monthly payment will be the minimum interest + enough money to lower the loan so it is paid off in 30 years.
The Bank doesn’t really care how much the overall house cost is as long as people keep taking out mortgages and paying them the interest. If the house is sold again a year later for 1 Million the bank gets their 800K back and can loan it to the next owner.
The seller would walk away with the full million sale price if the home is paid off.
The buyer pays the $200k down payment and the bank they’re borrowing from for their mortgage pays the other $800k. The mortgage is the loan to repay the bank that $800k (plus interest) over next 30 years.
A mortgage is a loan that uses your house as collateral
You want to buy a million dollar house. You put in say 20% (200k) so you borrow 800k from the bank which is a mortgage
You pay interest over x amount of years (30 is pretty common) and once you pay it all back, it’s yours fully
If you fail to pay back the loan, the bank will force you out of the house and sell it to recoup their losses. It might be worth more or less than you paid for it, but that’s the risk the bank takes on
Now if you decide to sell the house and it’s worth 1.5million, you pay the bank back what you owe and you keep any profit
If the new buyer is paying $1m for the house and only has $200k then they borrow the other $800k from the bank. The whole $1m is then given to the original owner, leaving them with a “profit” of $500k on the transaction (although they will have paid interest on their $500k mortgage during its lifetime and still have to obtain another home of their own).
So the half-mil profit mostly came from the new buyer borrowing 800k from the bank.
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