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Say I buy a home at the listing price of 100K. Let's assume that the loan amount is 150K.

Later, when selling the home, let's assume that the market has not changed and that I sell the house for what it's worth, 100K.

Does that mean that I owe the bank 50K? That seems wrong to me, but I'd like to be enlightened.

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    From reading all of the comments, I realize now that the reason you thought you might have to pay $150K to get a $100K mortgage is to cover the bank's profit in advance. But that's not how banks (typically) make their money. They make their money by charging interest. So if you took out a $100K loan at 4% interest, you would receive $100K (to give to the seller) and you would owe exactly $100K to the bank. If you decided to pay it back the next day, you would owe $100,011. ($11 in interest.) Every month that you make a payment, the total amount you owe the bank decreases.
    – TTT
    Jun 12, 2017 at 15:55
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    continued... if you always made minimum payments on the loan, for a 15 year loan you'd end up paying about $133K and for a 30 year loan you'd end up paying about $172K. (That gets closer to the $150K number you were thinking of.)
    – TTT
    Jun 12, 2017 at 16:00
  • That exactly encapsulates the question I had. I couldn't frame it quite right.
    – freedomflyer
    Jun 12, 2017 at 16:03
  • Some US states, and perhaps other jurisdictions, require that mortgages be written on a "non-recourse" basis. In those jurisdictions, the lender cannot pursue the borrower for any shortfall if they repossess and sell the property and it doesn't raise enough to cover the outstanding loan balance. So if you're in one of those jurisdictions, you can just walk away from a $150,000 mortgage on a $100,000 house without paying the $50,000 shortfall. But interest and capital payments already made are not deducted.
    – Mike Scott
    Aug 3, 2017 at 13:18

3 Answers 3

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Say I buy a home at the listing price of 100K. Let's assume that the loan amount is 150K.

This situation would never happen. A bank would not write a mortgage for 150% of the value of the property

Later, when selling the home, let's assume that the market has not changed and that I sell the house for what it's worth, 100K. Does that mean that I owe the bank 50K? That seems wrong to me, but I'd like to be enlightened.

Assuming you only made interest payments on the impossible loan then yes, you would owe the net amount remaining on your loan.

Typically a lender requires some amount of a downpayment primarily to avoid this situation. Say you buy your $100,000 house, and you put 20% down; your loan will be for $80,000. That means you could experience a 20% value decline and the lender can still foreclose on you and sell the property without losing any money (obviously ignoring transaction costs).

You seem to be really confused about interest. Interest is generally paid monthly on the outstanding principle of the loan. To calculate this assume a 5% interest rate and a $100,000 loan:

  $100,000 * 0.05/12 = $416.67

So your first month interest payment is $416.67. Typically loans are amortized so the borrower pays a set predictable amount each month, we'll assume a 30 year mortgage.

  In excel:
  =pmt(0.05/12, 30*12, -100000)

Which gives you a monthly payment of $536.82. So every month you pay $536.82, every month a reducing amount of that is interest (the amount reduces each month because the outstanding principle on the loan reduces as well).

So after the first month 

          Principle   Interest   Payment
 Month 1: $100,000  +  416.67  -  536.82
 Month 2:  $99,879  +  416.13  -  536.82 (the interest reduces because the there is less principle remaining)

Assuming your loan doesn't have a prepayment penalty, if you sell the property you don't owe any of the interest that would have been due in the future because you will pay off the remainder of the loan with proceeds from the sale of the property and keep whatever excess remains.

Your $100,000 loan is a loan for $100,000, not a loan for $536.82 * 360 = $193,255. You don't add all the expected interest in to the loan to express its value.

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  • There has to be a difference in the amount of money that I pay a seller, and the amount of money that I borrow, right?
    – freedomflyer
    Jun 12, 2017 at 6:03
  • @SpencerAllenGardner, yes because you will probably have to put money down which means you will generally borrow less than the value of the property, not more.
    – quid
    Jun 12, 2017 at 6:05
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    @SpencerAllenGardner See my update, I think it should help.
    – quid
    Jun 12, 2017 at 6:22
  • Your updated answer is exactly what I was looking for.
    – freedomflyer
    Jun 12, 2017 at 6:32
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    "A bank would not write a mortgage for 150% of the value of the property" - in the heady days of loose credit immediately before the crash, some UK lenders were in fact offering 125% mortgages, so confident were they (and most other people) that rising property prices would shortly rescue such loans from being underwater. They were wrong, of course, but had they started 2-3 years earlier they would have been right.
    – AakashM
    Jun 12, 2017 at 8:22
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You sure do (owe the remaining 50k to the bank).

If you bought the house for 100k, why would the loan be 150k? This seems strange and hard to achieve, but I'll go with what you said and assume so.
If the difference was cash-out, did you assume this is free money? If not cash-out, where did it go? If into interest, the you got something fir them, and you of course owe them back.

Either way, if the bank put 150k on the table, that's what you owe them back. It doesn't matter what you sold the house for or what it's worth.

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  • Do I misunderstand, then? Isn't there a difference between the listing price of a home and the amount of loan that I take on? 100K listing price, 150K loan amount?
    – freedomflyer
    Jun 12, 2017 at 5:40
  • The listing price is simply what seller would like to get, it has no meaning at all. The selling price is what you pay it for, and it normally matches the loan.
    – Aganju
    Jun 12, 2017 at 5:43
  • So that means that most often I'll be paying the seller the same amount as the loan that I get? So if I go with a 30 year mortgage vs a 15 year mortgage the seller will reap the benefits of that? I've never heard of that idea.
    – freedomflyer
    Jun 12, 2017 at 5:48
  • I don't understand what 'benefits' you mean. The seller gets the selling price of the house, and that's it. He doesn't know nor care where you got the money from and what kind of loan you take or not take. The bank will simply not give you a loan higher than the sale price.
    – Aganju
    Jun 12, 2017 at 6:02
  • Okay. So the bank gives me a loan for 100K, then. They make their money by charging me interest, though. So where is that factored in?
    – freedomflyer
    Jun 12, 2017 at 6:04
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Most mortgages require an appraisal to get approved. If the appraisal comes in lower than the amount of the mortgage, they will require the buyer to pay the difference in cash to the seller.

So if you bought a 100k house for 150k (I don't know why you would, but maybe you have a good reason). The mortgage company would require you to bring at least 50k of your own cash to the sale.

If you didn't want to pay mortgage insurance on top of the other interest on the mortgage, you would actually have to bring another 20k so that the loan would be 80k for a house that appraised at 100k. They call this loan to value ratio (LTV) and most lenders require you pay for insurance if the LTV is above 80%.

In the US, many people bought homes before a huge crash in home prices (2008-2011) and they owed much more than they could sell their homes for. Some banks allowed them to sell the loan for less, because it avoided the homes going through the foreclosure process which is very costly for banks. This is referred to as a short sale, but it only occurs when market values drop after the fact, not because a home was purchased for more than it was worth.

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  • I must have worded my question incorrectly. When shopping for homes, I may see a home that is listed at 100K. Let's assume after negotiation and such that I end up agreeing to buy the home for 100K from the seller. Then I go to my lender, agree to take out a loan for 150K in order to get the loan. If I turned around and sold them home the next day, I may be able to sell it for 100K, but it seems crazy that I'd owe the bank 50K automatically Does that make sense? I may not know exactly how to ask the question.
    – freedomflyer
    Jun 12, 2017 at 6:00
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    What would you do with the other 50K that the bank is loaning you? The house only costs 100K, so what happens to the rest of that money?
    – NL - Apologize to Monica
    Jun 12, 2017 at 6:05
  • If I'm a bank, I want to give people enough money to purchase the home and then charge them money on top of what I gave them to earn my money. If they give me 100K, then where is their profit?
    – freedomflyer
    Jun 12, 2017 at 6:06
  • You don't get a mortgage on the home and resell it the next day for the same amount. The mortgage accrues interest which is where the bank gets its profit. You pay the loan down over 30 years, so 100K over 360 months is an average of 278 each month, but when you charge 4% interest on that loan each year the actual payment is 477, or 199 in profit for the bank each month.
    – NL - Apologize to Monica
    Jun 12, 2017 at 6:09
  • @SpencerAllenGardner You list yourself as a BYU grad, so I'm going to point you to their resources: personalfinance.byu.edu/content/consumer-and-mortgage-loans-4
    – NL - Apologize to Monica
    Jun 12, 2017 at 6:17

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