Home Buying in 98101>Question Details

Gaurav, Home Buyer in Seattle, WA

What happens to a mortgage when a house is sold?

Asked by Gaurav, Seattle, WA Sun Sep 9, 2012

I am a first time home buyer, just starting to look. My question might be stupid!

If I have a mortgage on a home and I sell the home, what exactly happens to the mortgage? How does my lender recollect the money with interest that I had signed up for? For example, if I buy a 500K home, with 400K loan, and sell it after 3 years for 500K again.. Very likely, I would own more than 500K to my lender at that point. In that case, who pays the remaining balance over 500K to my lender?

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Don't worry, there are no stupid questions. If your example you've made one mistake, you've assumed that after three years you would owe more than $500,000 but that's not the case in fact if your original mortgage was for $400,000 and the interest rate was say 4% after three years, you would only owe just under $378,000. If you sold it for $500,000 your lender would be paid off in full and you'd receive a check for $122,000 less closing expenses (commission, attorney fees, and any state taxes that might be due on the transaction. Note that different states tax differently, some tax the buyer, some the seller. Typically these transfer taxes are in the range of 1-2% of the sales price.)

Interest only accumulates for the time you've borrowed the money. Each payment you make reduces the principal by a small amount and pays the lender the interest that has accrued over the previous month.

If you're thinking about buying I would advise you to find your self a good Realtor. (See link below on how to do this) and they can suggest some local lenders you could speak with who would be happy to pre-approve you and answer any questions you might have.
2 votes Thank Flag Link Sun Sep 9, 2012
lies, I have a mortgage with a 5% rate. The house was bought for 210000, and after five years I still owe 195000 on the house. Or am I being scammed
Flag Thu Mar 6, 2014
Hi Gaurav,

I see your question in your second entry here. You are almost right. Larry Tollen's numbers are good, but as you see from some of the other ones, in Washington State the cost of selling a house is roughly about 9% of the sales price. So your check will not be $122k. More like $77,000.

You cannot really say that the 3 years interest you have paid is a loss. It is a cost of the benefit of living in this house. The alternative to not buying, and thus not paying this interest, is to rent, so you would be out money anyway. You have to compare living cost and the benefits of owning vs renting.
So if you instead would have rented a house worth $500,000 for three years you would just be out the money for rent, have no upside potential in increased value, and the check for $77,000 would belong to your landlord whose mortgage you have been paying off through your rent.

To complicate matters a little you also should look at the after tax situation when comparing rent vs ownership. Because you can deduct the interest you pay from your income before it is taxed the actual payment is not that much. The tax code really favors home ownership.

I hope this can help you in your calculations!

Best wishes,
Gustaf
0 votes Thank Flag Link Mon Sep 10, 2012
Hi Gauray,

If you have a $400k loan on a $500k home, when you sell the home in three years, a very small part of the principal balance will be paid off, meaning your loan balance might be $370k. If the home were worth $520k at that time, your equity would be $150k minuse about 9% cost of sale in the state of Washington.

The proceeds of the home will pay the balance owed to the lender. The rest of the proceeds are your equity and you would use that to buy another property, which is wisest, or keep the equity for your own purposes.

I'm wondering if you're thinking of all the interest over the term of the loan that is paid. That interest only accrues as long as you have the loan. Remember, the value of the home and the principal balance on the loan are two distinct, separate numbers. Contact me if you have more questions. I can be reached at http://www.karenmcknight.com .
0 votes Thank Flag Link Sun Sep 9, 2012
Hi Gaurav

Escrow or Title Company will collect proceeds and pay off the bank and creditors ! Then give you the balance of the proceeds. You will be paying mortgage interest and principal monthly.

The mortgage interest is not accrued and paid at the time of selling. Those loans were called
Negative amortization loans and are not generally available.

Enjoy your home.

Perry

Http://www.ruthandperry.com
0 votes Thank Flag Link Sun Sep 9, 2012
Thanks for all the answers! Really helpful discussion..!

From Larry Tollen's answer, looks like I will get a check of 122K, but by then I would have paid 100K in downpayment + around 100K in interest = 200K. That means, I overall stand to lose around 80K + cost of selling and taxes, right?

Obviously, if the house appreciates and sells for more than 500K, I will lose less money over 5 years. I am getting this right?
0 votes Thank Flag Link Sun Sep 9, 2012
I tell all my clients, "There is no such thing as a stupid question". No doubt many people have the very same question, but you're the only one who's asked it. Your mortgage is calculated, or amortized, over 30 years, and every month you will make a payment. The payments include interest, insurance, and the principal portion of the payment. Your entire mortgage will be fully paid in 30 years. As you continue to own your home, the value will increase. As your mortgage balance declines each year, the additional value in the home is your equity. That's your money. Think of it as a savings account. If you decide to sell in, say, five years, you will have a mortgage balance that is less than $400,000 and you will have earned some equity in your home, pushing the value above what you paid for the home. At the time of sale, the escrow officer ---which is a neutral 3rd party--- will handle all the details of the sale. At escrow, you sign documents releasing your interest in the home and the new buyer signs documents to obligate themselves to the property, becoming the new owner. Escrow will receive the funds from the buyer, and use those funds to pay-off your mortgage. After escrow pays your remaining mortgage, the balance left over is yours --your equity. That's the cliff notes version of how real estate works. If you have any other questions, feel free to get in touch with me, or visit my website at http://www.akerscargill.com .
0 votes Thank Flag Link Sun Sep 9, 2012
All my colleagues have answered correctly. I doubt you would owe more than the original loan except for some unusual circumstances. 2 points not mentioned already - 1) you can call your Lender and ask what your current payoff balance is on the loan to take speculation out of the equation & 2) verify in your original loan documents that an early payoff penalty was not part of the loan.

Good Luck.
0 votes Thank Flag Link Sun Sep 9, 2012
Normal loans are "amortized" so that they are paid off over time. Thus unless you miss payments you should not owe more than the original balance.

Back before the peak there were a number of loan types that did negatively amortize (increase in balance), like the pick-a-payment type loan. I'm not sure any of those exist now.
0 votes Thank Flag Link Sun Sep 9, 2012
If you have a normal 30 year fixed interest loan. you are paying down the principle (400k in your example) bit by bit with each payment. when you sell the house, the buyers are paying off your mortgage, via the mortgage they get from their bank. Most, if not all, mortgages these days do not have a penalty for paying off the mortgage early (also known as a prepayment penalty). The bank does not ask for interest that they expected to get if you were to pay for 30 years, they only want the unpaid balance of the principle. You get to keep the rest of the money, In your example you would walk away with more than $100k since you only financed $400k and have paid down some of the original principle.
0 votes Thank Flag Link Sun Sep 9, 2012
The mortgage gets paid off. If you had a $400K mortgage and you have been making the payments it is very unlikely that you owe more than $400K unless of course you had a 'negative amortization loan', one in which you had the option of paying less than the interest owed. Those loans were available but were quite unusual. You might have had an interest only loan in which case you would owe the original $400K but if you had a standard loan then you would owe less than the original $400 because you would have been paying a little of that back each month.
0 votes Thank Flag Link Sun Sep 9, 2012
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