Lets say you buy a home for $300k, and put down a $100k payment and take out a $200k loan. The house was purchased for a fair, properly appraised value.

Does this mean that you are now $200k "in debt"? I read people referring to this as debt, but to me that doesn't make much sense. The house has a real value equal to the sum of your equity and your principle.

If a year down the road the house is reappraised for $250k, I could see how that would lead to "real debt" and being upside down in the loan, but as long as the assets securing a loan are worth more than the principle, is it correct to say that you are in debt?

Is there more than one context for "in debt" where it could be true in one sense, and not true in another?

  • Thanks @BenMiller, I searched for a bit and felt like someone probably asked a similar question, but didn't find that. – JPhi1618 May 5 '16 at 19:39

Yes, it means you are $200,000 in debt. If the value of all of your assets is greater than the value of all your debts, you have a positive "net worth." It doesn't change the definition of debt.

If you owe someone money, you are in debt.

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    +1 from me. One of the negative aspects of being in debt is that the loan can be called. If one cannot secure different financing or pay the balance, the asset must be liquidated. It happens. – Pete B. May 5 '16 at 19:22
  • See, that's where I have a hard time... If you have to pay off the loan, you just sell the house and the loan is gone. You gave something that you had (the house) back to the bank (via a sale and its proceeds) and now there is no debt. I guess I see debt as a liability that you have no way of covering, and maybe that's a bad definition. – JPhi1618 May 5 '16 at 19:27
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    If you owe the bank money you are in debt to the bank. Whether or not you have assets you could liquidate to repay the bank doesn't change your indebtedness. Debt is debt, net-worth is net-worth. You're conflating "positive net-worth" and "debt-free." Secured debt just changes the risk profile of the loan, because as you said, in theory, the debt is secured against an asset of enough value to satisfy the debt. – quid May 5 '16 at 19:37
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    When the US real estate bubble burst in 2006 the value of some houses dropped to be below the balance of the mortgage. In order to get out of debt, the seller needed to come up with cash at settlement. – mhoran_psprep May 5 '16 at 19:39

Is there more than one context for "in debt" where it could be true in one sense, and not true in another?

You may be thinking of the difference between secured and unsecured debts Investopedia Link.

A secured debt is "backed by" collateral as you mentioned in your comment to quid. Therefore, it is easier to discharge, although sometimes expensive to do so. Even without realtor's fees, selling a house (at least in the United States), has recording and title fees.

Unsecured debit is based on credit worthiness, not any property.

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