14

This is a very simple question, but I've had a hard time finding a simple answer.

Suppose Bob has a home that's worth $100k, with a mortgage, with $50k of the principal paid off (so he still owes the bank $50k for the house). Now say he sells it for $150k. Does the bank get the $50k it's owed, and Bob gets the remaining $100k from the sale?

On the surface, this would seem to make sense: Bob's only in debt for $50k, so that seems like the amount the bank should take. On the other hand, the bank obviously wouldn't have loaned Bob money in the first place if it didn't expect to make money on the loan (in the form of the interest payments).

So how much does the bank get, generally speaking? Is the profit somehow split based on how much principal Bob had paid off before the sale?

  • 7
    At any given moment in the life of the loan, you can ask the bank for the "payoff" amount. This is the amount you need to pay off the loan completely. This will include the total principal left on the loan, plus any interest that has accrued since the last installment payment, plus any prepayment penalties and other fees the bank adds in. That is all the bank gets. The rest, if any, is yours. You won't necessarily keep all of it, however, because you may have to cover other costs associated with selling the house. – Mohair Aug 4 '15 at 20:45
32

A mortgage is simply a loan backed by a property (and, because it's both very large and very common, covered by some specific laws). As such, the bank isn't an "investor" in your house; it simply is lending you money with the property as collateral. So, it doesn't get any share of the profit.

As long as you sell the house on your own, for more than you owe, most of the time in the US you will get about 92-94% of the sale price back, minus whatever you owe on the house. The 6-8% you don't get will go to the realtors as commission (unless you sell by owner and don't sell to someone with a buyer's agent), and to pay some of the costs of the sale (how much of those you pay depends on the deal you make with the buyer, but it's common to pay some of them in some areas). You also will owe taxes (potentially). You then pay the bank back from that amount.

As such, in your example, let's say Bob owes $50k on his house, and sells it with a realtor for $150k. He gets $150k-0.06*150k = 141k after commission.

He then hands the bank a check for the current payoff of the loan: that amount is usually slightly higher than the remaining principal, because you owe the interest that's accrued between [last payment you made] and [day of sale]. Let's say this is a 6% loan, which works out to around 0.5% per month, and it's been half a month since his last payment, so he owes another 0.25%, or another $125. Some mortgages also may have prepayment penalties (check your note). In this case there isn't a penalty, so the bank gets $50,125 from the sale. Usually, the bank would get that immediately at closing - ie, he doesn't get the full $141k or $150k and then write a check, instead the title/closing company gets that amount, and gives the $9k to the realtors, the $50,125 to the bank, and the remaining $90,875 to him.

Don't forget he may also owe income taxes, and sometimes other local taxes, on the profit on the sale. In this case the IRS wouldn't get anything (as it's under $250k), assuming it's a primary residence, but keep that in mind.

Also - in the case of a foreclosure, the bank will get some extra money to pay for the costs it incurred in foreclosing on and selling the house.

  • 1
    +1. This all assumes that the property isn't rented, because different tax calculations apply. In addition some mortgages do have prepayment penalties. – mhoran_psprep Aug 4 '15 at 19:34
  • 2
    @Joe: I'm pretty sure US law now forbids prepayment penalties on FHA loans. These days non-FHA loans don't seem to have them either, so I would guess either desire to competitive with FHA loans, or other regulations, have made it impractical to impose such penalties. – R.. Aug 5 '15 at 2:11
  • 1
    @Lilienthal The bank either possesses the title itself or has a lien on the property, in either case having the effect that you describe. In general the bank has a right only to require payment - ie, as long as you can fully repay the mortgage at closing the bank can't block a sale for any other reason (but can block a 'short sale' if it chooses). – Joe Aug 5 '15 at 11:23
  • 1
    I'd add just one thing to this otherwise excellent answer: RE the bank expects to make money on the loan: Absolutely. But banks also know that few people will really live in the same house for the full 30 year term that most mortgages are for. That's why banks typically charge substantial amounts of money at the time you take out the loan: closing costs, points, often a host of small fees that add up. These insure that the bank makes money even if you sell the house next week. You almost never find these up-front fees on other kinds of loans. – Jay Aug 5 '15 at 17:43
  • 2
    I don't think it is relevant to the question. I could add a lot of things like that, which would drive the character count up quote a lot. I mentioned taxes as something to be aware of, but for the specific question it's just not needed to go into that kind of detail. – Joe Aug 5 '15 at 18:53
4

Joe has explained how most mortgages work

A mortgage is simply a loan backed by a property (and, because it's both very large and very common, covered by some specific laws). As such, the bank isn't an "investor" in your house; it simply is lending you money with the property as collateral. So, it doesn't get any share of the profit.

However there are some mortgages when the bank takes part of the increase in the property value, e.g. Castletrust’s “But to Let Equity Loan” in the UK.

Other products allows a old person to take money out of their property in exchange for say 60% of what the property sells for on their death.

Islamic mortgages also work in a different way as interest is not allowed to be charged. For example

Unlike a conventional mortgage where the purchaser borrows money from a lender which is then repaid with interest, Al Rayan Bank's Sharia compliant Islamic mortgage alternatives (Home Purchase Plans or HPP) are based upon the Islamic finance principles of a Co-Ownership Agreement (Diminishing Musharaka) with Leasing (Ijara).

3

Sale price minus the loan balance, minus any closing costs is your net.

The numbers don't care whether you have a profit or loss, nor does the bank. People buy too high, pay a mortgage for 10 years, and walk away from the closing with little to no money, every day.

  • Especially since 2008... – Joe Aug 4 '15 at 21:22
3

The homeowner gets all the profit from the price rise, because it's their asset. The bank will charge early repayment fees, but these are often a small fraction of the profits.

This is why homeownership in rising markets is so popular: it offers the benefits of "gearing" a financial investment so that you can make profits that are a very large fraction of your principal (initial equity).

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .