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I am trying to understand the functioning of mortgage but I am having a bad time. I have been through many different types of concepts and calculations, but I still cannot get how exactly this works.

Say that I have $100,000 to buy a house in cash but instead I decided to get a loan. For instance, if I put down 20% of the value from my own pocket and get a 80% mortgage in a term of 30 years, and considering that a potential buyer appeared to me wanting to buy the property for $150,000 one month later, is it still possible to sell my property to him or her using the leverage I got from the lender?

Once, as far as I could understand, in the process of selling the lender will subtract my mortgage debt from the received money, but in a span of 30 years sometimes the debt can be much higher than the value of the property in the market, resulting in a very negative equity (like -300%).

And so in this case, considering that I could have paid in cash and benefited from +$50,000, I would have done the worst thing in all my life with now a debt for 30 years.

I am sorry for my ignorance, I need help understanding this.

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    I don't understand what you are asking. Are you asking if you can sell a house? If so that's easy. Yes. People do it all the time. If you owe more than you sell it for you will have to pay off the rest of your loan. – JohnFx Dec 2 '14 at 13:50
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I think you're missing the distinction between principal and interest.

In the scenario you describe, you start out with a loan whose principal is $80k. Interest accumulates on top of this at the rate agreed with your bank. The interest doesn't accumulate all at once; it happens a little bit each day.

Each month, you make a payment. Assuming this is a rational mortgage, your payment is enough to cover all of the accumulated interest, plus a little bit of the principal, each month. Because you paid off a little of the principal, next month's interest is a little less, and so the next month's payment pays off a little more of the principal in a process called amortization.

At any moment in time, the total amount you owe the bank is the remaining principal plus whatever interest has accumulated since your last payment. Yes, if you take the full 30 years to pay off the loan, you'll likely pay more in interest than the dollar amount of the loan. But that interest accumulates over time; it doesn't accumulate all at once.

Now for your scenario. A month after you took out your loan, and maybe made one payment, your principal is probably down to about $79,950 or so. Someone comes along and offers you $130k for the house. You then pay off all of the principal at once, leaving you a tidy $30,050 in profit once your $20k down payment is taken into account.

In reality, there are a boatload of fees, including agent's commission of about 6% in the US, so you wouldn't make as much profit. But that's the process.

Buying a house with the intent to sell it at a profit shortly thereafter is commonly called flipping, at least in the US.

  • +1, good answer, overall. The 6%? Someone came along, offering $130K. No agent is getting paid. – JoeTaxpayer Dec 2 '14 at 0:31
  • Note that the same process applies to refinancing a house -- the new loan pays off the remaining principal of the older loan. – keshlam Dec 2 '14 at 2:16
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You get an $80K loan, and pay fees, a few thousand dollars, give or take. There are a host of costs to the home buying process, some related to the mortgage itself, some not. You confirm the mortgage has no prepayment penalty. A month in, or even a few days in, you sell. You pay the bank back the $80,000, or $79,990 if you made a mortgage payment already. Yes, the 30 years of payments can add to more than twice the original amount, but the payments' total has a net present value of $80,000 using the mortgage rate as a discount value. There's no magic there. You don't owe the bank this money up front.

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