Why do people buy houses they don’t plan to pay off? Most people don’t spend their entire lives paying off one house, so what is the financial benefit of getting a “starter home”? I’m new to the economics of real estate and I’ll take any wisdom offered.
In: Economics
I buy a house for $500,000 with a $400,000 loan and $100,000 down payment. On day 0 I have $100,000 in equity, because I own the amount I already paid. I make mortgage payments to pay off that house over 30 years. Over 10 years, $100,000 of my payments have gone into principal, which means that my loan is now $300,000.
But during that time, my house has gone from being worth $500,000 to $700,000, and I still only have $300,000 on the loan.
If I sell the house, I can get $400,000 cash.
Of course there are things like property taxes, loan interest, homeowners insurance, and maintenance costs, but that’s out of scope for ELI5.
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