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 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.
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