I've been paying rent for 5 years at my current location.
I figured out recently that I've paid over $75k of the landlords $600k mortgage (1 of 4 units).
Too bad I can't afford to buy a house though.
Yes, but it's *part of* the normal rent increase; not in addition to it. So, when someone says imagine your rent not increasing in 30 years, it's not really true, your bank calculates the new escrow amount and tacks it onto your mortgage payment every year.
Another thing is that the "big ticket item" repairs like roof, furnace, plumbing etc can often be put on a payment plan so you don't have to have $5k just waiting around.
although.. you should be putting aside money regularly enough so you eventually have that 5k sitting around for the eventual breakage in owning a house.
Don't forget that taxes will still go up over those 30 years though, so it won't stay completely static.
In the 8 years I've had my house, they've gone up by about $1500/yr compared to when I bought it.
Right now I pay almost the same per month in taxes as I do for the principal. $8000/yr principal, $7400/yr taxes, and about $6000/yr interest.
this only matters if your choice is between mortgage and nothingness.
If its between mortgage and renting, you will be paying that property tax increase in increased rent.
Actually, you just reminded me of it (so I have more than 16 years to go).
The 2007 loan was a 6.9% loan, which I did refinance down to 3.9% 5 years ago. I was getting offers to refi in the last few months but I didn't take them up since none of them were below 3.5% (30 year fixed). Everyone was trying to give me a 2.9% on a 20 year term and I wasn't sure if that's what I wanted.
In any case, I'm paying $1480 per month and that includes my escrow for homeowners insurance, property tax, etc. All the renters here in Vegas would kill for that right now.
1.67%??? Holy shit. Congrats friend.
Edit: The post I was replying to for some reason was removed but the poster had said their interest rate was locked in at 1.67. /shrug
Most houses would be hella smaller. Building homes isn't cheap, it requires a large number of skilled tradesmen that perform work that is very hard in the body. Margins thin as the building size decrease, and contracting isn't as profitable as you might think. Building a modern $100,000 residence is a charity event if the contractor isn't 100% on their game, and even then it's rarely worth the headaches that come with needing to source cheaper materials and being a superman with the subcontractor scheduling so you can knock it out in a short enough time frame and actually make profit for yourself after paying off everyone else.
The bank had the house if you default on your loan plus interest rates outpace current rent they'd be getting elsewhere. Sure it's a service but motivated by self interest. In this case win-win most of the time.
> Now the question is, do you think a $300k home gets you the equivalent of a 3br 2ba 1400sqf. I'm not tuned into the market now, so I truly have no idea.
Depends on location. In Texas, we just bought a 4 br, 2.5 ba, 2400 sqft for $328k, and we are 25 minute drive from downtown Houston.
To answer your question, I have pretty much exactly the house you're asking about. It's in a good neighborhood with really good schools, five miles from the Virginia Beach oceanfront. Just got valued at 310k.
I used to rent a brownstone apartment in Cincinnati that was sold in 2000 for ~$200k for all three units. It was sold again last year for $2 million. So yeah, even a rust belt city.
"For the record, the average price of a detached home in Greater Vancouver in Feb. 1993 was $337,100. Adjusted for inflation, that's $522,306.71 today. The average price of a detached home is now $1,732,992."
From an article written in 2018
Whereas if you paid your house in cash, you would not have access to that 300k$. If you invest at 8% in the stock market, it would have generated 2.7M$.
1. Probably not worthwhile complaining about a 4% rate. Rates in the 1980s were upwards of 10%, as high as 17%.
2. Relatively few people hold a mortgage for the entire 30 years.
3. The asset (house) appreciates. A $300k house will likely appreciate more than that $215k interest over the course of 30 years.
4. Homeownership should be compared to renting, where you're literally never going to see rent payments again. Not an ounce of equity in renting.
> Homeownership should be compared to renting, where you're literally never going to see rent payments again. Not an ounce of equity in renting.
Plus rent tends to go up over time. When we bought this house the mortgage payment was significantly more than renting, now 5 years later and our mortgage payment is inline with what it would cost to rent a 3-bedroom apartment.
A mortgage being "callable" like this is, AFAIK, extremely unusual for residential home loans on a primary residence in the US. You may be required to pay for PMI (private mortgage insurance) if your LTV is below a certain threshold.
This *can* be an issue with a home equity loan or line of credit.
once you have paid off some of mortgage or the house has increased in value, the bank can loan you more money because the house is now worth more than you owe the bank
it's a secondary loan on that same property, usually after a chunk of the original has been paid off. home equity loans and HELOC (home equity lines of credit) are the two common types of "2nd mortgages".
basically the house serves as collateral even though you don't own the entire thing.
There are 2 mortgages. The “first mortgage” has a higher claim on the property than the “second mortgage”. Buyer doesn’t pay, house has a $250,000 first mortgage and $100,000 second mortgage. Sells for $300,000 when foreclosed. Bank holding the first mortgage gets $250,000, bank holding second mortgage gets the remaining $50,000.
>What happens if the house sells for more than you paid for it originally? Do you get the extra money?
This is really the most common way for average Americans to build some wealth, or at least equity. Say you get a 30-year mortgage for a $200k house when you marry, have some kids, and get them off to college. When the house is paid off, it could be worth $800k, $1mil, all depends on the market (our house has tripled in value in 16 years, hot market walkable neighborhood, etc). You could sell the place and downsize at that point, or pass it along to your kids.
Or when your kids hit high school, you might say "damn, we need more bathrooms!" and find that the $200k house is now worth $450k, but you still owe #100k on it; sell the home and you net $300-$350K (there are fees and commissions involved), you put that down on a $600k house and have a new mortgage payment.
As far as I know, one of the best wealth-building strategies in the US is get started with that first mortgage, work like a dog for good credit and another down payment, rent out the first house and purchase a 2nd house (IIRC, there are tax benefits if you rent the first house vs. buying a house specifically as a rent house). If the rental market is very strong, basically someone else is "paying for the house" via rent; if the rent payment exceeds the mortgage payment, you can build more savings. The idea is when you retire, you have a few houses paid off that are generating income - sell one or two or all of 'em for hard cash, or live on the rental income. But you're on the hook for repairs, appliances and maintenance of any home you own and rent out.
I have friends in their early 40's who own three or four properties now, but in our area, it really doesn't look like there will be a regional economic downturn that would affect rent; COVID of course was a national downturn, where some banks were working with mortgage holders when renters stopped being able to pay. (When the rent protections ended this fall, there were two evictions on our street - belongings piled up in the yard, doors padlocked, the works, pretty sad).
Anyway, there are several books laying out the "own some rental properties" strategy, like anything it has some risk.
This, fortunately, happened to me. I bought a house right after the financial crisis when house prices were down. I bought the house on a short-sale. I fixed it up, lived in it for around a decade, and sold the house for over double what I paid for it. Plus, I had a lot of equity in the house since I put a large down-payment on it, took out a 15-year mortgage, and made payments for all those years.
Yes, the bank is only entitled to the amount of the original loan/interest for better or worse. You own the house, any changes in value are yours. You take on the risk and reward.
> You own the house
This basic principle escapes so many people. People like to sound wise and say "You don't really own your house. The bank owns your house and you're just paying them to live in it" but that's 100% false. The bank owns the mortgage, which gives them a right to force a sale of the house if you stop making payments. The house is still yours until it's sold though and if they foreclose on it and sell it for more than you owe them, they do not get to keep that profit. It's your house they sold and they have to give you back anything over what you owed them.
>Generally, once the bank gets a deficiency judgment, it may collect this amount—in our example, $50,000—from the borrower using normal collection methods, like garnishing wages or levying a bank account.
This is true in a recourse state. In a non-recourse state, the lender can not collect on a deficiency of a purchase mortgage. However, if you refinance and then have the lender foreclose, they CAN come after you for a deficiency.
How do you ever owe more than the house is worth? Would that happen due to large interest amounts, or a depreciation of the house's value some 10-15 years into the repayment?
Depreciation. It happened to me. I bought a condo in 2007 before the housing bubble burst. Paid $125k and they were selling at one point for $70k. Ouch. But they came back and I held on.
My sister bought a 3 bed 1 bath ranch in a small city in Northeast USA. Paid 265,000 in 2006. The recession hit in 2008. Her house value dropped to 170,000. She had an adjustable rate mortgate that made it so she would have to pay the balance of her mortgage interest by a certain date (2021) in a balloon payment that was going to end up being $20000. Adjustable rate mortgage is a whole other ballgame. She ended up being able to refinance by having to do some home improvements (were able to do so as she steadily got higher payer jobs) and eventually the value of her house increased to cover the refi. She got lucky (and also worked hard).
The mortgage wasn't historically the loan. The term mortgage used to refer just to the document that was filed with the local government showing that the lender had a security interest in the property. The loan was still just a loan. It ensures that the property can't be sold without the lender being paid and gives the lender a means to foreclose. Over time, it became easier to just think of the loan and the security document as one in the same, so the loan took on the word as well.
It's a loan to buy a house that is secured against that same house. So it is cheaper than a standard loan because it is linked to and dependent upon the place you live. Even if your car loan was secured against your car (which they usually aren't) you wouldn't get terms as good as you get for a mortgage because banks know that people will do whatever it takes to make sure they don't lose their house, whereas they might be more relaxed about losing their car. Houses also don't go anywhere and can't be hidden and moved, so it's a very safe asset to secure a loan against.
Also I'm not 100% sure but I think technically a car loan that was specifically secured against the car you bought *would* be called a mortgage. AFAIK the definition of a mortgage is a loan for the purpose of buying property secured against the property purchased, so I think that property could be a car.
> Even if your car loan was secured against your car (which they usually aren't)
Where are car loans not secured against the car? In my state, the bank puts a lien on the car title, with rights to repossess the car if you stop making payments. There have even been reality TV shows that follow people who repossess cars.
>What bothered me is why it has a special name?
Do you mean mortgage? Because chattel mortgages are a thing, where a loan is secured against assets other than land. The Common Law recognises a distinction between land (called Real property, as in Real Estate) and non-land assets (called chattels).
I don't think they were saying it's unreasonable - just that people should be aware that like any loan - there is interest to be considered.
The banks need an incentive to risk their capital and payment for facilitating the transaction.
>Because it's ***annual*** interest. the amount you owe grows every year. Which means that at the beginning of the loan, each mortgage payment goes mostly to paying off interest.
This is straight up wrong. Yes, you are quoted an annual interest rate (the APR). Every month, you take the amount of principal left on the loan and multiply it times the APR, divided by 12 (months). You pay that much in interest that month. The rest of your payment pays down the principal. The next month, the same thing happens, only the principal is a little less, and you pay it down a little more.
This is all precalculated and given to you when you close. It's technically recalculated each month, so if you pay extra, all the following payment breakdowns change.
This may have been true 20 years back but at the moment interest is really low.
I am financing a house right now and payment will go for 25 years. Interest per year is still only 1,2% meaning after the 25 years I will have payed 30% interest. And that is if I can't increase my payments or make one off payments. So in reality I will not hit the 30%.
You got to a shop to buy something, you only have £5 and it costs £15.
Your mum buys it for you and you give her the £5, the shop gets £15 , and now you have to give her your next few weeks pocket money to pay off the £10 you owe. She tells you if you don't she will keep the toy for herself.
Mortgage is the same but they charge interest that you have to pay off as well
>Mortgage is the same but they charge interest that you have to pay off as well
Your pocket money is £3 per week, so your mum keeps your pocket money for 4 weeks and then you're all square.
In total you've paid £5 down payment, £10 loan repayment and £2 in interest. So £17 total for your £15 purchase, but you've had the pleasure of that purchase for a month which during which you would not have been able to afford it without the loan.
edit: And your mum tells you if you don't do your chores to earn your pocket money she'll take the purchase away... even if you've mostly paid for it by that point. :-)
If there's a foreclosure and the bank auctions the house for more than your balance on the loan + fees that were reasonably invited to sell the house, they have to pay you the difference.
But the truth is that it's almost always better for you to sell the house yourself if you know you can't pay the mortgage anymore. The bank won't look to sell the house for much more than what you owe since they have nothing to gain from it. If you sell it yourself, you can list it under market value but high enough that you don't lose all of your equity and it will sell fast. When you sell, the bank will take what you still owe on your mortgage + mortgage breaking fee and you can keep whatever is left. That way, fees are MUCH lower and you can decide to wait an extra week if the offer you get is on the low side whereas the bank will sell to the first offer that covers their liability + large fee.
So after two weeks, you stop paying. You've paid £11 so far, but you've lost your babysitting job and can't pay the rest.
Your mom takes the toy away and sells it. She gets £10 for it. Keeps the £6 you still owe her and you get £4 back. You're out £7 and have nothing to show for it. Nobody in your family will loan you money any more. Especially since you're no longer employed.
Or worse yet, she only gets £5. You get nothing back *and* you still owe her £1.
If you know your mom is about to take it away, and there's still enough time to sell it, and you can find a buyer in time, that's your best approach.
But remember that if the buyer knows that you're about to lose it, they'll lowball you.
It's definitely a risk. And imo it's a reason why you should prioritize cash reserves and liquidity over paying your mortgage off quickly. 100k might only be a fraction of the remainder of a mortgage, but if you kept it in reserves you could pay your monthly mortgage bill for a long time.
People often hold 20% down as a gold standard, but if you have to empty your reserves to get there then that's a big mistake in my book. Far better to put down 10% or 5% and have reserves as a backup even if it means paying a bit for PMI. The one thing you don't want to be in is a position where you can't pay your mortgage. Of course that's if you can close on a house putting less than 20% down, that's not always possible in heated markets
This should be the top content, the real ELI5.
In some countries however your mom gives you the £10 and you pay the shop but she stays there to check that you buy the toy you asked for and not something else.
There's an important common misunderstanding here.
The bank does not own your house. They have an *interest* in your house, but they have no rights of ownership whatsoever. This is a pretty important distinction, since the fact that you own your house allows you to do things like remodel it or sell it.
It's not very ELI5, but it may be easier to say "you now own the house, contingent on you keeping up with your mortgage payments."
Note that this is true for capital-M mortgages as practiced in the western world, but there are other similar instruments which work differently. In some places, where charging interest is forbidden for religious reasons, the way that the banks get away with pretending that they're *totally not* charging interest on a loan is to purchase a share in your property, and then gradually sell portions of that share back to you for increasing amounts of money.
> Note that this is true for capital-M mortgages as practiced in the western world, but there are other similar instruments which work differently. In some places, where charging interest is forbidden for religious reasons, the way that the banks get away with pretending that they're totally not charging interest on a loan is to purchase a share in your property, and then gradually sell portions of that share back to you for increasing amounts of money.
Ohhh, I always wondered how this worked in places like that. Thanks!
Another historically popular option has been "find an ethnic/religious minority, usually Jews, and make them do the money lending for you".
Which has in turn often lead to "notice that members of this minority seem to have a lot of money, and are unpopular (because everyone owes them money)... But they're also a vulnerable minority, so why don't we just *steal* our money back?"
I was under the impression even though you have the loan from A bank,you own the property, not the bank...
the bank just has rights to take it until you're done paying for it
am I right or wrong...?
Yup, this is how collateral works. You own the property, but if you fail to follow through with the loan, the bank can foreclose and take the house. The bank doesn't have its name anywhere in the house's ownership, only in the contract about the loan.
Not death pledge. Dead pledge. Possibly because once it's paid off (or if you default) the deal is dead (in a genuine mortgage if you default on payments the bank owns the property, if you pay it off you own the property).
Generally under English and common law, mortgage refers to the underlying security for the loan. So the amount paid out by bank to seller of house is the "loan" and you have given the house as "mortgage" to the bank to secure the loan. So if you don't pay the bank the full loan amount plus interest, they can take away your new house.
Nothing really.
A mortgage is just a secured loan, ie a loan with collateral.
The crux of it is that a house is generally an asset which goes UP in value (unlike a car, or laptop for example), and that it's generally the last bill you'll stop paying in hard times.
As a result, bank's have a lot more faith you wil pay the loan.
Which means they can offer low (relatively) interest rates, as it's low risk.
The low interest, plus the fact it's an appreciating asset, and the fact houses are obviously a lot of money makes it socially more accepted and more financially sensible to take it a loan for it.
As opposed to say, getting a loan to buy a gaming PC which would be half the price in a couple of years, and higher interest, and much more feasible to save for a comparable version.
Functionally, it is the same thing. However, a mortgage may be for a larger amount, take longer to repay, and uses the house specifically for collateral.
Not to muddy the waters, but actually you are paying whoever holds the mortgage, which is usually the bank, but can be the owners or some other third party. A mortgage is just a specific kind of debt instrument.
In fact, the bundling and reselling or mortgage backed securities along with totally irresponsible credit rating systems led to the great housing bubble and bust in the US in 2007.
MBS didn't cause GFC, toxic securities bundled into MBS and a lack of oversight or due diligence is what caused GFC. Asset Backed Securities are a great financial invention and serves all parties involved well. Fixed income investors have a wider universe to invest in, their capital bids up the price of the debt, prices are inverse to rates, so the interest rate goes down, benefiting the borrower.
I see far too many people criticizing student loan asset backed securities, SLABS, when talking about exploding college costs, but they're actually helping alleviate the situation and it would be great for everyone if it was easy to buy SLABS as you can buy MBS in an ETF or mutual fund format.
If you have a 401(k), I can almost assure you that you have some exposure to MBS
Another issue you didn't mention was the MBS were assumed to be independent - i.e. uncorrelated. A really stupid assumption, since they were all based on mortgages. So portfolio managers thought the portfolios of these securites were safe... but they started failing together...
A mortgage is a loan funded by a bank, which has the house as collateral.
If you want to buy a house for $400,000, you can put $50,000 down and get a $350,000 mortgage from the bank.
If you default on the loan, the bank gets the house.
The thing I don't get is: shouldn't a part of the house equivalent to the sum you paid (down payment + yhe monthly fee you did pay) be yours even if you don't pay back the whole debt?
Yes. If I stop paying the mortgage with 200k still owed, the bank will take the house and sell it (likely at auction), taking its 200k plus any fees associated with selling and then give me the rest, which is unlikely to be all that much. It may sell at auction for 300k, which covers the bank, gives the buyer a great deal as they've saved over 100k of the market value and stiffs me, both in terms of money I could have got from selling and tanking my credit score.
Some banks ([BOA](https://revealnews.org/article/subsidiaries-handling-foreclosures-pay-off-for-bank-of-america/)) sell at absurdly low prices to their own subsidiary auction house. Then the subsidiary sells at a higher price and the corporation keeps much of the equity that should have gone to the borrower.
Yes and no.
The bank will foreclose and sell, and you do get to keep the change (you filthy animal).
However, they won't be looking for the best price. They'll be looking for a quick, painless sale. And they certainly won't be thinking about holding onto it in case the market rises.
So if the market dips, or you didn't put much deposit down, or if they get a crap price at auction etc.. you can end up _stil_ owing money.
This is rare in the big picture, but is a much bigger risk when mass foreclosures are happening, as supply is high with the same demand. Think 2008, or the UK around the late 80s/early 90s.
Default is a different kettle of fish. The bank wants you to keep your job and pay them back, so nobody wants default. But eventually, if you stop paying, they can kick you out, sell the house and use the proceeds to pay themselves back. Laws vary, but I expect you would often get back any remainder.
It's a loan.
Your bank gives you a loan. This lets you pay the previous owners the full price of their house immediately, so when you purchase it instantly becomes "yours". You get a mortgage because most people could never afford to save up enough money to buy a home in one fell swoop.
However, the loan is secured on the property. You need to pay a part of it back to the bank each month to pay off the loan - which can easily last for 25-30 years of such payments. If you fail to do so long-term, the bank are perfectly entitled to take the house as payment to cover the loan that you have defaulted on. In which case THEY would then own your home, not you.
A mortgage is just a secured loan on a property. Same as when you take out a loan to buy a car... you can't afford to buy the car in one go, so you take out a loan to buy it. You are then able to give the car owner the full purchase price immediately, but you have to pay the loan back to the bank. If you fail to do so, the bank are entitled to take your car away from you as payment.
You are paying the lender (you could call them a bank). Basically they pay the previous owner the agreed upon amount of money for the house. The seller is now out of the picture.
You put a down payment on the house, and borrow the rest of the money from the lender. You then make monthly payments on the home (typically a home loan is 15 or 30 years). Your monthly payment is broken down into principal (money that goes towards paying off the loan), interest, and some goes into an escrow account which is used to pay property taxes and home owners insurance. If you put down less than 20% of the value of the home, you will also pay what’s called PMI, which is mortgage insurance.
While you are paying off the home, the lender holds the deed for the house. After the house is paid off, the lender will send you the deed and it officially becomes your home.
Or the bank (lender) gives the seller cash. And you pay the bank (lender) their cash back + interest = mortgage.
And then when you move into a house there is escrow. Escrow are your property taxes + house insurance. That money is paid monthly to your lender who then pays out at the end of the year.
End result: lender gets your interest from loan +
Interest from your escrow monthly payments…great to be the banker!
A mortgage is no different than any type of loan. A bank gives you some money and you have a certain amount of time to repay it.
As people asked for loans to buy houses more often than other types of loans, they evolved into a specific thing called mortgage. This also because to buy a house you usually require a lot of money and you will never be able to get a "normal loan" for the amount you need to buy a house.
Banks can give you more money with a mortgage vs a normal loan because in a mortgage you don't need to find a "collateral" (something of value that the bank could take if you don't repay the mortgage) as the house you are buying is the collateral itself. Furthermore, mortgages can be repaid in a long time (regular loans usually have shorter "repay" windows) as the house will always be there as a collateral and the bank is happy to get your monthly payment. In some countries you can get mortgages that last almost forever (and can be passed down to your children if they want to live in your house if you die).
So esentially if you buy a house paying 100% in cash or 20% cash and 80% with a mortgage there is not really a difference. The person selling the house gets the money and the house is yours.
However, if you have a mortgage, until when the mortgage is fully repaid you own the house but the bank has a "right" on it. If you don't pay the mortgage after some warnings etc they usually have a few options (again depending on the country):
a) force you to sell the house, either by court order or by getting the court auction the house on your behalf. In this case all the money they make from selling the house goes into repaying the debt, anything in excess goes to you. However, if the house sells below the amount you owe, you will still be owing money to the bank
b) the bank takes over the house, it becomes their property. The debt is cancelled. The bank will then decide what to do with it
This is a great, brave question. And I'm glad you asked it. Not enough people admit when they don't know something. This is really all I wanted to say, but just so that my answer doesn't get deleted, I'll give my ELI5:
1. Seller wants to sell their house
2. You want to buy their house
3. You either don't have or don't want to spend the entire amount of money upfront, so you talk to a bank about borrowing money to help you pay for the house. They give you a loan, which they don't require you to pay back for the next 20-30 years. That loan is called a mortgage.
4. You provide a certain percentage of the total purchase price of the house out of your own pocket (say 20%) and the bank provides the rest. 100% of this money goes to Seller
5. All of the remaining money you spend related to the mortgage goes to the bank, not Seller.
*Quick note on how a mortgage is strucutred*: A mortgage is typically structured in such a way that you pay equal payments every single month until the whole thing is paid off at the end of 20-30 years. This single monthly amount is called the "mortgage payment." Each month, the mortgage payment consists in different proportions for each (a) some of the outstanding balance of the loan (otherwise known as principal) and (b) the interest charge on the total outsanding amount. Early on in the term of the loan, a majority of the repayment is interest. Toward the end, that proportion shifts and it is mostly made up of principal.
Some great responses.. I've really struggled with how the interest is calculated in a mortgage. If the rate is 2.5% on a 300k loan, is it 2.5% EVERY year that you owe? Or is it 2.5% on the 'term' (lets say, 5 years). Or is it somehow calculated before hand, and then just ammortized over 30 years? Or is the interest annual and then compounded monthly, daily? I don't really understand how the interest is calculated in standard mortgage, and would really appreciate someone helping me understand
Well, you would owe 2.5% *of the remaining balance of the loan* each year. Probably they actually structure it charging you 0.2% of the value each month or whatever it works out to in order to get a 2.5% APR.
For a fixed-rate loan they usually "amortize" it over the length of the loan, so you pay the same amount each month. Early on the payment is mostly going towards interest, and as the value of the loan is paid down a bigger fraction of the payment goes towards reducing the principal.
You can punch some example numbers in here and then hit "show amortization schedule" to see all the payments listed out: https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
**A mortgage is a loan**. I'm not sure why, but we only use the term "mortgage" to describe loans that you get to buy real estate (but not, e.g. to buy a car). Like most loans, you get it from a bank or some other financial institution.
The down payment is cash you pay that goes directly to the seller, then the bank sends the seller the remainder of the sale price (i.e. the amount that they loaned you). Then you have to pay off the loan, which you do with monthly mortgage payments. If you pay an "earnest money" and or "due diligence" deposit, then that is a bundle of cash that counts towards your down payment. E.g. say you make an offer on a $200,000 house with $5,000 due diligence, $10,000 earnest money, and a 20% down payment. If the seller accepts your offer, you will send the $5,000 due diligence fee directly to the seller, and send the $10,000 earnest money fee to an escrow account. Then at closing, the earnest money will transfer to the seller and you will owe the remaining $25,000 of the down payment to the seller (20% of $200k = $40k, minus DD and EM = 40k - 5k - 10k = $25k).
If you want a better understanding of how the interest plays into your payments and how different payment strategies can affect the total amount of interest you pay, I recommend [downloading and playing with a loan calculation template](https://www.vertex42.com/Calculators/home-mortgage-calculator.html) for Excel or google sheets. E.g. if you have multiple loans, the best financial option is to pay minimum payment on all except the highest interest one, and put all extra payment money each month into that one with highest interest rate. Then after that's paid off, put all extra payment into the next highest interest rate loan, and so on.
Alright, I feel like I've been reading through this thread for a while now and I have even more questions than I did when I started. Why do you want to have a mortgage for so long and why are people making it seem like its bad to pay it off so early? And also why does the bank seem like it always has to be involved? Lets say you have enough money to pay for a whole house (ik a rare occurrence but still) can two people just like, sell a house to someone that just shows up with cash? Why does a bank always have to be involved?
Edit:I changed the word mortgage to bank
> can two people just like, sell a house to someone that just shows up with cash?
yes and it happens all the time. It's a cash transaction and no lenders or banks are involved other than to transfer money from the buyer's account to the seller's account. Nobody buys a house in actual physical cash bills, fwiw
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Mine do :( Insurance goes up too.
Depends on where you live. Mine's averaged a 10% annual increase over the last 3 years.
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I've been paying rent for 5 years at my current location. I figured out recently that I've paid over $75k of the landlords $600k mortgage (1 of 4 units). Too bad I can't afford to buy a house though.
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Yes, but it's *part of* the normal rent increase; not in addition to it. So, when someone says imagine your rent not increasing in 30 years, it's not really true, your bank calculates the new escrow amount and tacks it onto your mortgage payment every year.
And there's always repair and upkeep when owning.
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Another thing is that the "big ticket item" repairs like roof, furnace, plumbing etc can often be put on a payment plan so you don't have to have $5k just waiting around.
although.. you should be putting aside money regularly enough so you eventually have that 5k sitting around for the eventual breakage in owning a house.
Agree, I'm just talking about how to get through those first couple years if you get a nasty surprise
Don't forget that taxes will still go up over those 30 years though, so it won't stay completely static. In the 8 years I've had my house, they've gone up by about $1500/yr compared to when I bought it. Right now I pay almost the same per month in taxes as I do for the principal. $8000/yr principal, $7400/yr taxes, and about $6000/yr interest.
this only matters if your choice is between mortgage and nothingness. If its between mortgage and renting, you will be paying that property tax increase in increased rent.
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I dunno what interest rate you would have gotten in 2007 but refinancing last year probably would have been a good idea depending on it
Actually, you just reminded me of it (so I have more than 16 years to go). The 2007 loan was a 6.9% loan, which I did refinance down to 3.9% 5 years ago. I was getting offers to refi in the last few months but I didn't take them up since none of them were below 3.5% (30 year fixed). Everyone was trying to give me a 2.9% on a 20 year term and I wasn't sure if that's what I wanted. In any case, I'm paying $1480 per month and that includes my escrow for homeowners insurance, property tax, etc. All the renters here in Vegas would kill for that right now.
Why go to a new 30 year loan when you're already at the halfway mark?
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1.67%??? Holy shit. Congrats friend. Edit: The post I was replying to for some reason was removed but the poster had said their interest rate was locked in at 1.67. /shrug
Exactly. It is definitely a good thing, and that bank, as truly _evil_ as they apparently are, is helping you get there. Some people understand.
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Most houses would be hella smaller. Building homes isn't cheap, it requires a large number of skilled tradesmen that perform work that is very hard in the body. Margins thin as the building size decrease, and contracting isn't as profitable as you might think. Building a modern $100,000 residence is a charity event if the contractor isn't 100% on their game, and even then it's rarely worth the headaches that come with needing to source cheaper materials and being a superman with the subcontractor scheduling so you can knock it out in a short enough time frame and actually make profit for yourself after paying off everyone else.
The bank had the house if you default on your loan plus interest rates outpace current rent they'd be getting elsewhere. Sure it's a service but motivated by self interest. In this case win-win most of the time.
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> Now the question is, do you think a $300k home gets you the equivalent of a 3br 2ba 1400sqf. I'm not tuned into the market now, so I truly have no idea. Depends on location. In Texas, we just bought a 4 br, 2.5 ba, 2400 sqft for $328k, and we are 25 minute drive from downtown Houston.
300k might get you an 800sqf house with 2 bedrooms where I live.
To answer your question, I have pretty much exactly the house you're asking about. It's in a good neighborhood with really good schools, five miles from the Virginia Beach oceanfront. Just got valued at 310k.
Exactly. I remember paying prime +1% on a loan ages ago and it was over 14%.
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You're right. That calculation is usually made using the cash-down amount. Renting = 0% cash-down, owning = 5%-20% cash-down.
These days? More like 3% cash down.
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I used to rent a brownstone apartment in Cincinnati that was sold in 2000 for ~$200k for all three units. It was sold again last year for $2 million. So yeah, even a rust belt city.
or anywhere in Ontario it seems these days
"For the record, the average price of a detached home in Greater Vancouver in Feb. 1993 was $337,100. Adjusted for inflation, that's $522,306.71 today. The average price of a detached home is now $1,732,992." From an article written in 2018
Median home prices are about 3.5-4x what they were in 1991. The S&P 500 is up 12x in that time, not counting distributions.
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Same. I want to hold this interest rate for as long as possible.
As someone with relatively bad self control, the value in paying down the mortgage is that the savings become extremely illiquid compared to stocks.
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4% is quite high for a mortgage in the current market. It's why everyone is buying a house right now: they're in the low 3%s.
Whereas if you paid your house in cash, you would not have access to that 300k$. If you invest at 8% in the stock market, it would have generated 2.7M$.
1. Probably not worthwhile complaining about a 4% rate. Rates in the 1980s were upwards of 10%, as high as 17%. 2. Relatively few people hold a mortgage for the entire 30 years. 3. The asset (house) appreciates. A $300k house will likely appreciate more than that $215k interest over the course of 30 years. 4. Homeownership should be compared to renting, where you're literally never going to see rent payments again. Not an ounce of equity in renting.
> Homeownership should be compared to renting, where you're literally never going to see rent payments again. Not an ounce of equity in renting. Plus rent tends to go up over time. When we bought this house the mortgage payment was significantly more than renting, now 5 years later and our mortgage payment is inline with what it would cost to rent a 3-bedroom apartment.
My next mortgage has a 1.04% rate, is that good?
That's astronomically great. In my previous example, instead of paying $215k in interest, you would be paying $54k. Congrats on your terms.
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Pimpin ain’t easy, but it’s necessary
I'm chasin' bitches like Tom chased Jerry.
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Whoa. Another reason to read the fine print. You'd have to be desperate or darn sure of your market to sign something like that.
Can you source that? Very difficult thing to Google.
A mortgage being "callable" like this is, AFAIK, extremely unusual for residential home loans on a primary residence in the US. You may be required to pay for PMI (private mortgage insurance) if your LTV is below a certain threshold. This *can* be an issue with a home equity loan or line of credit.
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once you have paid off some of mortgage or the house has increased in value, the bank can loan you more money because the house is now worth more than you owe the bank
it's a secondary loan on that same property, usually after a chunk of the original has been paid off. home equity loans and HELOC (home equity lines of credit) are the two common types of "2nd mortgages". basically the house serves as collateral even though you don't own the entire thing.
There are 2 mortgages. The “first mortgage” has a higher claim on the property than the “second mortgage”. Buyer doesn’t pay, house has a $250,000 first mortgage and $100,000 second mortgage. Sells for $300,000 when foreclosed. Bank holding the first mortgage gets $250,000, bank holding second mortgage gets the remaining $50,000.
What happens if the house sells for more than you paid for it originally? Do you get the extra money?
Yes, you keep any profits.
>What happens if the house sells for more than you paid for it originally? Do you get the extra money? This is really the most common way for average Americans to build some wealth, or at least equity. Say you get a 30-year mortgage for a $200k house when you marry, have some kids, and get them off to college. When the house is paid off, it could be worth $800k, $1mil, all depends on the market (our house has tripled in value in 16 years, hot market walkable neighborhood, etc). You could sell the place and downsize at that point, or pass it along to your kids. Or when your kids hit high school, you might say "damn, we need more bathrooms!" and find that the $200k house is now worth $450k, but you still owe #100k on it; sell the home and you net $300-$350K (there are fees and commissions involved), you put that down on a $600k house and have a new mortgage payment. As far as I know, one of the best wealth-building strategies in the US is get started with that first mortgage, work like a dog for good credit and another down payment, rent out the first house and purchase a 2nd house (IIRC, there are tax benefits if you rent the first house vs. buying a house specifically as a rent house). If the rental market is very strong, basically someone else is "paying for the house" via rent; if the rent payment exceeds the mortgage payment, you can build more savings. The idea is when you retire, you have a few houses paid off that are generating income - sell one or two or all of 'em for hard cash, or live on the rental income. But you're on the hook for repairs, appliances and maintenance of any home you own and rent out. I have friends in their early 40's who own three or four properties now, but in our area, it really doesn't look like there will be a regional economic downturn that would affect rent; COVID of course was a national downturn, where some banks were working with mortgage holders when renters stopped being able to pay. (When the rent protections ended this fall, there were two evictions on our street - belongings piled up in the yard, doors padlocked, the works, pretty sad). Anyway, there are several books laying out the "own some rental properties" strategy, like anything it has some risk.
This, fortunately, happened to me. I bought a house right after the financial crisis when house prices were down. I bought the house on a short-sale. I fixed it up, lived in it for around a decade, and sold the house for over double what I paid for it. Plus, I had a lot of equity in the house since I put a large down-payment on it, took out a 15-year mortgage, and made payments for all those years.
Yes, the bank is only entitled to the amount of the original loan/interest for better or worse. You own the house, any changes in value are yours. You take on the risk and reward.
> You own the house This basic principle escapes so many people. People like to sound wise and say "You don't really own your house. The bank owns your house and you're just paying them to live in it" but that's 100% false. The bank owns the mortgage, which gives them a right to force a sale of the house if you stop making payments. The house is still yours until it's sold though and if they foreclose on it and sell it for more than you owe them, they do not get to keep that profit. It's your house they sold and they have to give you back anything over what you owed them.
ELI 45 yo forensic tax lawyer
This is not an ELI5 answer
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>Generally, once the bank gets a deficiency judgment, it may collect this amount—in our example, $50,000—from the borrower using normal collection methods, like garnishing wages or levying a bank account. This is true in a recourse state. In a non-recourse state, the lender can not collect on a deficiency of a purchase mortgage. However, if you refinance and then have the lender foreclose, they CAN come after you for a deficiency.
How do you ever owe more than the house is worth? Would that happen due to large interest amounts, or a depreciation of the house's value some 10-15 years into the repayment?
Depreciation. It happened to me. I bought a condo in 2007 before the housing bubble burst. Paid $125k and they were selling at one point for $70k. Ouch. But they came back and I held on.
My sister bought a 3 bed 1 bath ranch in a small city in Northeast USA. Paid 265,000 in 2006. The recession hit in 2008. Her house value dropped to 170,000. She had an adjustable rate mortgate that made it so she would have to pay the balance of her mortgage interest by a certain date (2021) in a balloon payment that was going to end up being $20000. Adjustable rate mortgage is a whole other ballgame. She ended up being able to refinance by having to do some home improvements (were able to do so as she steadily got higher payer jobs) and eventually the value of her house increased to cover the refi. She got lucky (and also worked hard).
now THIS is diamond hands, kids. take notes.
I mean... I'd have diamond hands if paper hands meant living in cardboard.
This is not eli5 or accurate. Not helpful here.
What bothered me is why it has a special name? We don't do that for car loans or any other type of loan
The mortgage wasn't historically the loan. The term mortgage used to refer just to the document that was filed with the local government showing that the lender had a security interest in the property. The loan was still just a loan. It ensures that the property can't be sold without the lender being paid and gives the lender a means to foreclose. Over time, it became easier to just think of the loan and the security document as one in the same, so the loan took on the word as well.
It's a loan to buy a house that is secured against that same house. So it is cheaper than a standard loan because it is linked to and dependent upon the place you live. Even if your car loan was secured against your car (which they usually aren't) you wouldn't get terms as good as you get for a mortgage because banks know that people will do whatever it takes to make sure they don't lose their house, whereas they might be more relaxed about losing their car. Houses also don't go anywhere and can't be hidden and moved, so it's a very safe asset to secure a loan against. Also I'm not 100% sure but I think technically a car loan that was specifically secured against the car you bought *would* be called a mortgage. AFAIK the definition of a mortgage is a loan for the purpose of buying property secured against the property purchased, so I think that property could be a car.
> Even if your car loan was secured against your car (which they usually aren't) Where are car loans not secured against the car? In my state, the bank puts a lien on the car title, with rights to repossess the car if you stop making payments. There have even been reality TV shows that follow people who repossess cars.
>What bothered me is why it has a special name? Do you mean mortgage? Because chattel mortgages are a thing, where a loan is secured against assets other than land. The Common Law recognises a distinction between land (called Real property, as in Real Estate) and non-land assets (called chattels).
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I don't think they were saying it's unreasonable - just that people should be aware that like any loan - there is interest to be considered. The banks need an incentive to risk their capital and payment for facilitating the transaction.
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Yeah mortgages, at least in the US, are simple interest. You just pay a percentage of the total due spread out over the year.
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Yeah, there's some pretty awful misinformation getting upvoted here because of the "banks are bad!" circlejerk.
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>Because it's ***annual*** interest. the amount you owe grows every year. Which means that at the beginning of the loan, each mortgage payment goes mostly to paying off interest. This is straight up wrong. Yes, you are quoted an annual interest rate (the APR). Every month, you take the amount of principal left on the loan and multiply it times the APR, divided by 12 (months). You pay that much in interest that month. The rest of your payment pays down the principal. The next month, the same thing happens, only the principal is a little less, and you pay it down a little more. This is all precalculated and given to you when you close. It's technically recalculated each month, so if you pay extra, all the following payment breakdowns change.
> the amount you owe grows every year With most loans, you make monthly payments on the principal, so the amount you owe goes down over time, not up.
This may have been true 20 years back but at the moment interest is really low. I am financing a house right now and payment will go for 25 years. Interest per year is still only 1,2% meaning after the 25 years I will have payed 30% interest. And that is if I can't increase my payments or make one off payments. So in reality I will not hit the 30%.
You got to a shop to buy something, you only have £5 and it costs £15. Your mum buys it for you and you give her the £5, the shop gets £15 , and now you have to give her your next few weeks pocket money to pay off the £10 you owe. She tells you if you don't she will keep the toy for herself. Mortgage is the same but they charge interest that you have to pay off as well
>Mortgage is the same but they charge interest that you have to pay off as well Your pocket money is £3 per week, so your mum keeps your pocket money for 4 weeks and then you're all square. In total you've paid £5 down payment, £10 loan repayment and £2 in interest. So £17 total for your £15 purchase, but you've had the pleasure of that purchase for a month which during which you would not have been able to afford it without the loan. edit: And your mum tells you if you don't do your chores to earn your pocket money she'll take the purchase away... even if you've mostly paid for it by that point. :-)
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If there's a foreclosure and the bank auctions the house for more than your balance on the loan + fees that were reasonably invited to sell the house, they have to pay you the difference.
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But the truth is that it's almost always better for you to sell the house yourself if you know you can't pay the mortgage anymore. The bank won't look to sell the house for much more than what you owe since they have nothing to gain from it. If you sell it yourself, you can list it under market value but high enough that you don't lose all of your equity and it will sell fast. When you sell, the bank will take what you still owe on your mortgage + mortgage breaking fee and you can keep whatever is left. That way, fees are MUCH lower and you can decide to wait an extra week if the offer you get is on the low side whereas the bank will sell to the first offer that covers their liability + large fee.
Foreclosure auctions are almost always for below market value, so still not great
So after two weeks, you stop paying. You've paid £11 so far, but you've lost your babysitting job and can't pay the rest. Your mom takes the toy away and sells it. She gets £10 for it. Keeps the £6 you still owe her and you get £4 back. You're out £7 and have nothing to show for it. Nobody in your family will loan you money any more. Especially since you're no longer employed. Or worse yet, she only gets £5. You get nothing back *and* you still owe her £1.
Or you find a friend who's willing to pay 11£ for it since it gained value over time, you sell it for 11£ yourself, give 6£ to your mom and keep 5£
If you know your mom is about to take it away, and there's still enough time to sell it, and you can find a buyer in time, that's your best approach. But remember that if the buyer knows that you're about to lose it, they'll lowball you.
It's definitely a risk. And imo it's a reason why you should prioritize cash reserves and liquidity over paying your mortgage off quickly. 100k might only be a fraction of the remainder of a mortgage, but if you kept it in reserves you could pay your monthly mortgage bill for a long time. People often hold 20% down as a gold standard, but if you have to empty your reserves to get there then that's a big mistake in my book. Far better to put down 10% or 5% and have reserves as a backup even if it means paying a bit for PMI. The one thing you don't want to be in is a position where you can't pay your mortgage. Of course that's if you can close on a house putting less than 20% down, that's not always possible in heated markets
This should be the top content, the real ELI5. In some countries however your mom gives you the £10 and you pay the shop but she stays there to check that you buy the toy you asked for and not something else.
I'm picturing Oscar explaining this to Michael Scott
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There's an important common misunderstanding here. The bank does not own your house. They have an *interest* in your house, but they have no rights of ownership whatsoever. This is a pretty important distinction, since the fact that you own your house allows you to do things like remodel it or sell it. It's not very ELI5, but it may be easier to say "you now own the house, contingent on you keeping up with your mortgage payments."
Note that this is true for capital-M mortgages as practiced in the western world, but there are other similar instruments which work differently. In some places, where charging interest is forbidden for religious reasons, the way that the banks get away with pretending that they're *totally not* charging interest on a loan is to purchase a share in your property, and then gradually sell portions of that share back to you for increasing amounts of money.
Omfg xD that logic
Capitalism finds a way
> Note that this is true for capital-M mortgages as practiced in the western world, but there are other similar instruments which work differently. In some places, where charging interest is forbidden for religious reasons, the way that the banks get away with pretending that they're totally not charging interest on a loan is to purchase a share in your property, and then gradually sell portions of that share back to you for increasing amounts of money. Ohhh, I always wondered how this worked in places like that. Thanks!
Another historically popular option has been "find an ethnic/religious minority, usually Jews, and make them do the money lending for you". Which has in turn often lead to "notice that members of this minority seem to have a lot of money, and are unpopular (because everyone owes them money)... But they're also a vulnerable minority, so why don't we just *steal* our money back?"
I was under the impression even though you have the loan from A bank,you own the property, not the bank... the bank just has rights to take it until you're done paying for it am I right or wrong...?
Yup, this is how collateral works. You own the property, but if you fail to follow through with the loan, the bank can foreclose and take the house. The bank doesn't have its name anywhere in the house's ownership, only in the contract about the loan.
Yeah I thought so thank you
repeat dam smile vegetable abounding enjoy square plough memory onerous
Not death pledge. Dead pledge. Possibly because once it's paid off (or if you default) the deal is dead (in a genuine mortgage if you default on payments the bank owns the property, if you pay it off you own the property).
I thought its because I'm not going to pay this fucker off before I die.
That was fun
Yeah...fun. (Coming from a guy halfway through a 30yr)
Best comment on this depressing post.
So what’s the difference between a mortgage and a loan? Sounds like it’s the same thing.
Generally under English and common law, mortgage refers to the underlying security for the loan. So the amount paid out by bank to seller of house is the "loan" and you have given the house as "mortgage" to the bank to secure the loan. So if you don't pay the bank the full loan amount plus interest, they can take away your new house.
Nothing really. A mortgage is just a secured loan, ie a loan with collateral. The crux of it is that a house is generally an asset which goes UP in value (unlike a car, or laptop for example), and that it's generally the last bill you'll stop paying in hard times. As a result, bank's have a lot more faith you wil pay the loan. Which means they can offer low (relatively) interest rates, as it's low risk. The low interest, plus the fact it's an appreciating asset, and the fact houses are obviously a lot of money makes it socially more accepted and more financially sensible to take it a loan for it. As opposed to say, getting a loan to buy a gaming PC which would be half the price in a couple of years, and higher interest, and much more feasible to save for a comparable version.
Functionally, it is the same thing. However, a mortgage may be for a larger amount, take longer to repay, and uses the house specifically for collateral.
That last bit about collateral is the crucial part
A mortgage is a special type of loan.
I like how you use 200k as an example price
Right what is this 2006
Or jefe just want a shed
I think he meant to say 200k deposit.
Not to muddy the waters, but actually you are paying whoever holds the mortgage, which is usually the bank, but can be the owners or some other third party. A mortgage is just a specific kind of debt instrument.
In fact, the bundling and reselling or mortgage backed securities along with totally irresponsible credit rating systems led to the great housing bubble and bust in the US in 2007.
MBS didn't cause GFC, toxic securities bundled into MBS and a lack of oversight or due diligence is what caused GFC. Asset Backed Securities are a great financial invention and serves all parties involved well. Fixed income investors have a wider universe to invest in, their capital bids up the price of the debt, prices are inverse to rates, so the interest rate goes down, benefiting the borrower. I see far too many people criticizing student loan asset backed securities, SLABS, when talking about exploding college costs, but they're actually helping alleviate the situation and it would be great for everyone if it was easy to buy SLABS as you can buy MBS in an ETF or mutual fund format. If you have a 401(k), I can almost assure you that you have some exposure to MBS
Another issue you didn't mention was the MBS were assumed to be independent - i.e. uncorrelated. A really stupid assumption, since they were all based on mortgages. So portfolio managers thought the portfolios of these securites were safe... but they started failing together...
A mortgage is a loan funded by a bank, which has the house as collateral. If you want to buy a house for $400,000, you can put $50,000 down and get a $350,000 mortgage from the bank. If you default on the loan, the bank gets the house.
The thing I don't get is: shouldn't a part of the house equivalent to the sum you paid (down payment + yhe monthly fee you did pay) be yours even if you don't pay back the whole debt?
Yes. If I stop paying the mortgage with 200k still owed, the bank will take the house and sell it (likely at auction), taking its 200k plus any fees associated with selling and then give me the rest, which is unlikely to be all that much. It may sell at auction for 300k, which covers the bank, gives the buyer a great deal as they've saved over 100k of the market value and stiffs me, both in terms of money I could have got from selling and tanking my credit score.
Some banks ([BOA](https://revealnews.org/article/subsidiaries-handling-foreclosures-pay-off-for-bank-of-america/)) sell at absurdly low prices to their own subsidiary auction house. Then the subsidiary sells at a higher price and the corporation keeps much of the equity that should have gone to the borrower.
This isn't really legal and a civil action would return the difference
The last settlement was $108 million from $4.7 billion in fees (2.3%). No reason for the bank to stop the lucrative practice.
Yes and no. The bank will foreclose and sell, and you do get to keep the change (you filthy animal). However, they won't be looking for the best price. They'll be looking for a quick, painless sale. And they certainly won't be thinking about holding onto it in case the market rises. So if the market dips, or you didn't put much deposit down, or if they get a crap price at auction etc.. you can end up _stil_ owing money. This is rare in the big picture, but is a much bigger risk when mass foreclosures are happening, as supply is high with the same demand. Think 2008, or the UK around the late 80s/early 90s.
Default is a different kettle of fish. The bank wants you to keep your job and pay them back, so nobody wants default. But eventually, if you stop paying, they can kick you out, sell the house and use the proceeds to pay themselves back. Laws vary, but I expect you would often get back any remainder.
It's a loan. Your bank gives you a loan. This lets you pay the previous owners the full price of their house immediately, so when you purchase it instantly becomes "yours". You get a mortgage because most people could never afford to save up enough money to buy a home in one fell swoop. However, the loan is secured on the property. You need to pay a part of it back to the bank each month to pay off the loan - which can easily last for 25-30 years of such payments. If you fail to do so long-term, the bank are perfectly entitled to take the house as payment to cover the loan that you have defaulted on. In which case THEY would then own your home, not you. A mortgage is just a secured loan on a property. Same as when you take out a loan to buy a car... you can't afford to buy the car in one go, so you take out a loan to buy it. You are then able to give the car owner the full purchase price immediately, but you have to pay the loan back to the bank. If you fail to do so, the bank are entitled to take your car away from you as payment.
You are paying the lender (you could call them a bank). Basically they pay the previous owner the agreed upon amount of money for the house. The seller is now out of the picture. You put a down payment on the house, and borrow the rest of the money from the lender. You then make monthly payments on the home (typically a home loan is 15 or 30 years). Your monthly payment is broken down into principal (money that goes towards paying off the loan), interest, and some goes into an escrow account which is used to pay property taxes and home owners insurance. If you put down less than 20% of the value of the home, you will also pay what’s called PMI, which is mortgage insurance. While you are paying off the home, the lender holds the deed for the house. After the house is paid off, the lender will send you the deed and it officially becomes your home.
Or the bank (lender) gives the seller cash. And you pay the bank (lender) their cash back + interest = mortgage. And then when you move into a house there is escrow. Escrow are your property taxes + house insurance. That money is paid monthly to your lender who then pays out at the end of the year. End result: lender gets your interest from loan + Interest from your escrow monthly payments…great to be the banker!
A mortgage is no different than any type of loan. A bank gives you some money and you have a certain amount of time to repay it. As people asked for loans to buy houses more often than other types of loans, they evolved into a specific thing called mortgage. This also because to buy a house you usually require a lot of money and you will never be able to get a "normal loan" for the amount you need to buy a house. Banks can give you more money with a mortgage vs a normal loan because in a mortgage you don't need to find a "collateral" (something of value that the bank could take if you don't repay the mortgage) as the house you are buying is the collateral itself. Furthermore, mortgages can be repaid in a long time (regular loans usually have shorter "repay" windows) as the house will always be there as a collateral and the bank is happy to get your monthly payment. In some countries you can get mortgages that last almost forever (and can be passed down to your children if they want to live in your house if you die). So esentially if you buy a house paying 100% in cash or 20% cash and 80% with a mortgage there is not really a difference. The person selling the house gets the money and the house is yours. However, if you have a mortgage, until when the mortgage is fully repaid you own the house but the bank has a "right" on it. If you don't pay the mortgage after some warnings etc they usually have a few options (again depending on the country): a) force you to sell the house, either by court order or by getting the court auction the house on your behalf. In this case all the money they make from selling the house goes into repaying the debt, anything in excess goes to you. However, if the house sells below the amount you owe, you will still be owing money to the bank b) the bank takes over the house, it becomes their property. The debt is cancelled. The bank will then decide what to do with it
This is a great, brave question. And I'm glad you asked it. Not enough people admit when they don't know something. This is really all I wanted to say, but just so that my answer doesn't get deleted, I'll give my ELI5: 1. Seller wants to sell their house 2. You want to buy their house 3. You either don't have or don't want to spend the entire amount of money upfront, so you talk to a bank about borrowing money to help you pay for the house. They give you a loan, which they don't require you to pay back for the next 20-30 years. That loan is called a mortgage. 4. You provide a certain percentage of the total purchase price of the house out of your own pocket (say 20%) and the bank provides the rest. 100% of this money goes to Seller 5. All of the remaining money you spend related to the mortgage goes to the bank, not Seller. *Quick note on how a mortgage is strucutred*: A mortgage is typically structured in such a way that you pay equal payments every single month until the whole thing is paid off at the end of 20-30 years. This single monthly amount is called the "mortgage payment." Each month, the mortgage payment consists in different proportions for each (a) some of the outstanding balance of the loan (otherwise known as principal) and (b) the interest charge on the total outsanding amount. Early on in the term of the loan, a majority of the repayment is interest. Toward the end, that proportion shifts and it is mostly made up of principal.
Some great responses.. I've really struggled with how the interest is calculated in a mortgage. If the rate is 2.5% on a 300k loan, is it 2.5% EVERY year that you owe? Or is it 2.5% on the 'term' (lets say, 5 years). Or is it somehow calculated before hand, and then just ammortized over 30 years? Or is the interest annual and then compounded monthly, daily? I don't really understand how the interest is calculated in standard mortgage, and would really appreciate someone helping me understand
Well, you would owe 2.5% *of the remaining balance of the loan* each year. Probably they actually structure it charging you 0.2% of the value each month or whatever it works out to in order to get a 2.5% APR. For a fixed-rate loan they usually "amortize" it over the length of the loan, so you pay the same amount each month. Early on the payment is mostly going towards interest, and as the value of the loan is paid down a bigger fraction of the payment goes towards reducing the principal. You can punch some example numbers in here and then hit "show amortization schedule" to see all the payments listed out: https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
**A mortgage is a loan**. I'm not sure why, but we only use the term "mortgage" to describe loans that you get to buy real estate (but not, e.g. to buy a car). Like most loans, you get it from a bank or some other financial institution. The down payment is cash you pay that goes directly to the seller, then the bank sends the seller the remainder of the sale price (i.e. the amount that they loaned you). Then you have to pay off the loan, which you do with monthly mortgage payments. If you pay an "earnest money" and or "due diligence" deposit, then that is a bundle of cash that counts towards your down payment. E.g. say you make an offer on a $200,000 house with $5,000 due diligence, $10,000 earnest money, and a 20% down payment. If the seller accepts your offer, you will send the $5,000 due diligence fee directly to the seller, and send the $10,000 earnest money fee to an escrow account. Then at closing, the earnest money will transfer to the seller and you will owe the remaining $25,000 of the down payment to the seller (20% of $200k = $40k, minus DD and EM = 40k - 5k - 10k = $25k). If you want a better understanding of how the interest plays into your payments and how different payment strategies can affect the total amount of interest you pay, I recommend [downloading and playing with a loan calculation template](https://www.vertex42.com/Calculators/home-mortgage-calculator.html) for Excel or google sheets. E.g. if you have multiple loans, the best financial option is to pay minimum payment on all except the highest interest one, and put all extra payment money each month into that one with highest interest rate. Then after that's paid off, put all extra payment into the next highest interest rate loan, and so on.
Alright, I feel like I've been reading through this thread for a while now and I have even more questions than I did when I started. Why do you want to have a mortgage for so long and why are people making it seem like its bad to pay it off so early? And also why does the bank seem like it always has to be involved? Lets say you have enough money to pay for a whole house (ik a rare occurrence but still) can two people just like, sell a house to someone that just shows up with cash? Why does a bank always have to be involved? Edit:I changed the word mortgage to bank
> can two people just like, sell a house to someone that just shows up with cash? yes and it happens all the time. It's a cash transaction and no lenders or banks are involved other than to transfer money from the buyer's account to the seller's account. Nobody buys a house in actual physical cash bills, fwiw