I was talking with a friend and we discussed something that I havent really considered before.
He claimed that he was underwater on his house because if we wanted to sell it he would only be able to sell it at market value while still being significantly underwater on his loan because he would be required to pay both the principal and the 30 years of mortgage interest to the bank. So in essence, if he bought the house at $175,000 and with 30 years of amortization he would pay a total of $250,000 over the loans lifetime; as a result he would make no profit unless the house sold for >250k.
It may be a pretty basic question, but I havent considered this before. I was under the impression (perhaps incorrectly) that if you bought a property you would only be required to factor in the principal (and closing costs) when you sold the property. I thought the buyer of your property would inherit the bank's mortgage loan (and the interest over its lifetime) and at that time refinance as they saw fit.
I hope this question made sense, any insight regarding this would be helpful.
You are correct.....if you make your payments your princ will continually go down, which is all you have to pay back.....always less than you borrowed.
@Kevin Krato , after already making monthly payments for years, the payout figure for a normal amortized loan should be less than the amount originally borrowed (because, the Bank has already been receiving the interest due to date, and some incremental principal).
You are correct that "you would only be required to factor in the (remaining) principal (and closing costs) when you sold the property".
So, in the scenario you described, as long as the home is valued at more than the principal payout figure, it's not underwater! Will this alleviate his concerns? [Please let us know].
If sold "Subject to", then yes, the Buyer can take on the Bank's mortgage loan, but then, whether that Buyer reneges, or not, the Bank can still chase down the original Borrower and call in the remaining balance at any time. [If confused, research "subject to" selling/buying]. My 2c...
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