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?
In: 5
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.
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