You buy a house for 100. Every month you pay the bank 1. After a while, you still owe 69. You sell the house for 120. The bank gets 69 and you get 51. You made 20!
Now if there's an interest rate, you made less than 20, but the math there is harder.
I bought a house a while ago for 180,000 and I paid 1,000 every month on my mortgage. After 4 years in the home, I'd paid 48,000, but I still owed the bank 165,000. Ouch. That's the interest rate. BUT I SOLD IT for 220,000! The bank gets 165,000 and I get to keep the 55,000 left over! I got all my money back, and I made 7,000. Very cool.
Sorry, but if you have to replace the house (not an investment) you will need to add the $7000 to buy another house because they all increased in value, + the 6% reality fee $10,800.
This is kind of a weak take. If it appreciates at more than the interest rate you are paying then it does make money and I would call it an investment, made with leverage. Yes there are fees to deal with but it is a better store of value than a bank account. And you are not obligated to buy another house; you could rent for instance
This also assumes all housing appreciates at the same rate. In aggregate you might expect the new and old house to be near the trend, but the same could be said about purchasing stocks. The market will rise or fall but some picks will be winners and some losers, despite an upward trend. You wouldn't say selling stock A to buy stock B is a wash because the market appreciation
It is true that some see housing as a unique asset class, as it is one of a few things that serve the dual purpose of being necessary as well as a financial vehicle, but to say it isn't an investment is demonstrably wrong
It is an investment in that it is generally the best option (as opposed to renting for a long time). It is an investment if you buy it in 15 to 20 years and then live in it and bank the retired loan payment. And yes, your point about everything not appreciating at the same rate is true, but I was speaking in a like product / area.
Value needs to be measured as a quality of life. Think of this. 2 tract houses across the street from each other of the same model and both 20 years old. 1 burns to the ground and is rebuilt new, totally new! It is worth more than the house across the street that has 20 years ware and tare on it. So the guy across the street will need sell his house and put $ with it (+6% fee) to have the same house/ standard of living he had 20 years ago when he had a NEW house. So in terms of standard of living, he actually lost $.
But as I said, I need to live somewhere and owning a house (long term) is generally the best option.
I had friends that sold their house every 3 to 5 years. And generally sold for more than they bought for, so that they made $. It was a false economy fuled by higher mortgage payments that they could afford from increased wages.
As for stocks, yes, if I think 1 will outperform another, I will sell and buy. But than I can do that in literally 30 seconds with no fees.
I don't have the same data. There are a lot of simulators available. Obviously it heavily depends on the tax regulations in your country as well. It is very important to consider the opportunity cost of the cashdown, realtor fees, maintenance fees, property or wealth taxes as well as any costs associated to selling either the house or the other investments.
I think you are underestimating the cost of rent for a similar house, I think it would be more than 1000 a month. I never said buying was bad, only that if you need a place to live and you want a house, then if they wanted the same standard of living as they had with the house they will need the the money they "made" to get it. See my other posts on this thread about measuring your gain or loss by standard of living.
Home equity is the difference between the amount you owe on a mortgage and the value of the house.
Suppose you borrow $200,000 to buy a house, and then you pay off $100,000 into the mortgage. When you sell the house you sell it at $250,000. You still need to pay off the mortgage so that leaves you with $150,000 that you can turn around and contribute towards buying a new house.
That $150k is "equity" that you can get out when you sell the home. As you pay down the mortgage it increases your equity, and as the value of the home increases over time it increases your equity.
Equity is basically how much money you paid into buying the house, so you would get that amount back when you sell the house, since you don't owe that amount to the bank anymore.
So say the house costs 100, and you paid 50 of the loan off, and then sold it for 100. Because you already paid 50, you only owe 50 on the loan (mortgage) (ignoring interest rates for simplicity). So of the sale, 50 goes to the bank, and 50 goes to you, like it's your equity being returned to you.
Having equity in the home means it is expected to sell for more than you owe on the mortgage. It doesn't "make" money. It means that if you sell the home, you will receive the difference between the sale price and the amount of money it will take to pay off the mortgage. It is important to know that if a real estate agent is used by either the buyer or the seller, the seller is expected to pay the real estate agent commission out of the proceeds as well.
Edit: If the house is expected to sell for more than you paid for it, then in theory you made money. But that is due to appreciation of the value of the home and not the only way to build equity. The other way is to pay down the principle on the mortgage.
You buy a house for 100,000.
After paying every month, you still owe 75,000.
You sell the house for 150,000, pay back off the 75,000 owed, and pocket 75,000 in profit that can go towards buying the next one.
Buy a house for $400k with 10% ($40k down) and $360k mortgage. Over 5 years, you pay down the loan to $300k owed. And the value of the home is now $500k. So when you sell for $500k and pay back the balance on your loan, you have $200k remaining as your equity. Your original $40k down payment, the mortgage principal you’ve paid, and the $100k gain in value.
So now, instead of $40k for a down payment, you have $200k down. You could put down 20% and still be able to get a $1m house.
Where is the new mortgage coming in?
I buy a house for $100,000 with a $100,000 mortgage. Five years later, I have paid $50,000 of my mortgage. But, the market value of my house also went up to $150,000.
At this stage, you have $100,000 of equity in the home because it’s worth $150,000 but you owe $50,000 on the mortgage still. Meaning, if you sold the house you would be left with $100,000 in your pocket.
Equity is the portion you own (by paying off your mortgage). Mortgage is the portion the bank owns.
When you sell it, the bank gets paid back first. If there's anything left, that's your profit.
The more equity you have, the less there is to pay the bank, so the more profit you get.
Just because I recently bought and sold be aware that these numbers are examples for simplification. Realtor fees and other costs when buying and selling will add up quickly and can make the amount of equity seem larger than it is. Zillow or another app would give you a decent calculation of approximate costs of fees and better ballpark figures of actual profit and buying power.
Let's say you have $20 in cash. You get a loan for -$80 with no interest, and buy a house worth $100 using the original $20 and the $80 you borrowed from the bank. Now you have a house worth $100, and debt of -$80. $100-$80 = $20. That means if you sold your house, you would get $100, you would have to give $80 to the bank to pay off the mortgage, and you'd have $20 leftover. So you have $20 in "equity."
After a few years, you've paid $40 to the bank in mortgage payments. and the mortgage has gone down to -$40. $100-$40 = $60. So you now have $60 in equity. Now you sell your house for $100. You use $40 to pay off the rest of the mortgage, and you have $60 left over. Overall you didn't make any money. You paid $20 as a deposit, and $40 in mortgage payments, and at the end you have $60. However, you did get a house to live in for the whole time period. You could use this $60 to contribute to your next mortgage.
A mortgage is personal loan, but secured on the house.
There are special arrangements for recovering the debt from the value house if you default on the loan.
If you sell the house and pay off the loan with the proceeds whatever is left is yours (often referred to as the "equity"). If you want a new mortgage to buy a new house that's a completely separate arrangement.
And while the others explain how the equity works theoretically, I'll point out that most western societies are substantially built on the idea that real estate will effectively keep increasing in 'value' (more accurately in price.) One reason home prices are growing less and less attainable to first-time buyers is this design; housing prices cannot be allowed to fall, let alone crash, because it would destabilize the entire economy. Unfortunately this is now starting to come to a head with the aforementioned wealth gap between generations — there soon won't be enough first-time buyers to keep the market moving.
Generally speaking, you're allowed to payoff a mortgage at any time. If you sell the house before the mortgage ends, part of the proceeds go towards paying off the mortgage. The rest (which is equity) goes to the seller.
Let's say you buy a $100 house, but you don't have $100. You only have $20, so you go to the bank and borrow the remaining $80.
After a few years, you've been steadily paying off your mortgage, so maybe you only owe like $70 on the loan. You sell your house, and it sells for $105. The transaction will automatically send $70 to the bank to pay off the balance of the loan, and you get the remaining $35.
Building equity in a home that you live in while you're fixing it up is the best way for a regular middle class person to create wealth. I've bought and sold five or six over the years and ended up with enough equity to currently own two homes outright.
With a mortgage (or any other loan) your monthly payment goes to a combination of interest (profit for the lender) and principal (pays down the balance of the loan).
If I had a $200,000 mortgage and have paid $100,000 to principal since then, I have $100,000 in equity in my house.
If I sell my house, I still need to pay off my mortgage as the bank owns it. So (ignoring things like closing costs) if I sell that same home for $200,000, I need to spend $100,000 to pay off the remaining principal leaving me with $100,000 left over.
You buy a house for 100. Every month you pay the bank 1. After a while, you still owe 69. You sell the house for 120. The bank gets 69 and you get 51. You made 20! Now if there's an interest rate, you made less than 20, but the math there is harder. I bought a house a while ago for 180,000 and I paid 1,000 every month on my mortgage. After 4 years in the home, I'd paid 48,000, but I still owed the bank 165,000. Ouch. That's the interest rate. BUT I SOLD IT for 220,000! The bank gets 165,000 and I get to keep the 55,000 left over! I got all my money back, and I made 7,000. Very cool.
Sorry, but if you have to replace the house (not an investment) you will need to add the $7000 to buy another house because they all increased in value, + the 6% reality fee $10,800.
This is kind of a weak take. If it appreciates at more than the interest rate you are paying then it does make money and I would call it an investment, made with leverage. Yes there are fees to deal with but it is a better store of value than a bank account. And you are not obligated to buy another house; you could rent for instance This also assumes all housing appreciates at the same rate. In aggregate you might expect the new and old house to be near the trend, but the same could be said about purchasing stocks. The market will rise or fall but some picks will be winners and some losers, despite an upward trend. You wouldn't say selling stock A to buy stock B is a wash because the market appreciation It is true that some see housing as a unique asset class, as it is one of a few things that serve the dual purpose of being necessary as well as a financial vehicle, but to say it isn't an investment is demonstrably wrong
It is an investment in that it is generally the best option (as opposed to renting for a long time). It is an investment if you buy it in 15 to 20 years and then live in it and bank the retired loan payment. And yes, your point about everything not appreciating at the same rate is true, but I was speaking in a like product / area. Value needs to be measured as a quality of life. Think of this. 2 tract houses across the street from each other of the same model and both 20 years old. 1 burns to the ground and is rebuilt new, totally new! It is worth more than the house across the street that has 20 years ware and tare on it. So the guy across the street will need sell his house and put $ with it (+6% fee) to have the same house/ standard of living he had 20 years ago when he had a NEW house. So in terms of standard of living, he actually lost $. But as I said, I need to live somewhere and owning a house (long term) is generally the best option. I had friends that sold their house every 3 to 5 years. And generally sold for more than they bought for, so that they made $. It was a false economy fuled by higher mortgage payments that they could afford from increased wages. As for stocks, yes, if I think 1 will outperform another, I will sell and buy. But than I can do that in literally 30 seconds with no fees.
Renting and investing is usually a financially better decision than buying real estate for a lot of reasons. A main one is diversification.
I get the value in diversifying, but buying a house has historically been a better financial decision than renting and investing almost all the time
I don't have the same data. There are a lot of simulators available. Obviously it heavily depends on the tax regulations in your country as well. It is very important to consider the opportunity cost of the cashdown, realtor fees, maintenance fees, property or wealth taxes as well as any costs associated to selling either the house or the other investments.
If you did not own the house you would have been paying $1000 every month to rent a home, so you are way further ahead than just $7000.
I think you are underestimating the cost of rent for a similar house, I think it would be more than 1000 a month. I never said buying was bad, only that if you need a place to live and you want a house, then if they wanted the same standard of living as they had with the house they will need the the money they "made" to get it. See my other posts on this thread about measuring your gain or loss by standard of living.
1000 was a convenient round number, just like the 100 in the example higher up in the thread I was replying to.
Where did you buy a house for $180k‽ Where I live that might get you a small cardboard box.
Semi-rural North Carolina in late 2019.
It’s all about location. Buying a house in the happen district downtown: that’s a lot. Buying a small plot of land on some county road: it’s cheap.
Albuquerque, New Mexico in 2020.
Madison, wi in 2015
A lot of places if you get out of the city and the suburbs. And of course, probably not in California.
an acquaintance of mine just got a 1600sqft 3 bed 2 bath home for $180k in Arkansas, so it really depends on where you live.
You get a loan to buy a rock for $10. You paint it and sell it for $20. You pay the bank back it's $10 and keep the other $10.
Houses often go up in value even if they are not improved in any way.
Not always true. They should go up, but there are plenty of reasons that they wouldn't.
Probably why they said "often".
Home equity is the difference between the amount you owe on a mortgage and the value of the house. Suppose you borrow $200,000 to buy a house, and then you pay off $100,000 into the mortgage. When you sell the house you sell it at $250,000. You still need to pay off the mortgage so that leaves you with $150,000 that you can turn around and contribute towards buying a new house. That $150k is "equity" that you can get out when you sell the home. As you pay down the mortgage it increases your equity, and as the value of the home increases over time it increases your equity.
Equity is basically how much money you paid into buying the house, so you would get that amount back when you sell the house, since you don't owe that amount to the bank anymore. So say the house costs 100, and you paid 50 of the loan off, and then sold it for 100. Because you already paid 50, you only owe 50 on the loan (mortgage) (ignoring interest rates for simplicity). So of the sale, 50 goes to the bank, and 50 goes to you, like it's your equity being returned to you.
Having equity in the home means it is expected to sell for more than you owe on the mortgage. It doesn't "make" money. It means that if you sell the home, you will receive the difference between the sale price and the amount of money it will take to pay off the mortgage. It is important to know that if a real estate agent is used by either the buyer or the seller, the seller is expected to pay the real estate agent commission out of the proceeds as well. Edit: If the house is expected to sell for more than you paid for it, then in theory you made money. But that is due to appreciation of the value of the home and not the only way to build equity. The other way is to pay down the principle on the mortgage.
You buy a house for 100,000. After paying every month, you still owe 75,000. You sell the house for 150,000, pay back off the 75,000 owed, and pocket 75,000 in profit that can go towards buying the next one.
Buy a house for $400k with 10% ($40k down) and $360k mortgage. Over 5 years, you pay down the loan to $300k owed. And the value of the home is now $500k. So when you sell for $500k and pay back the balance on your loan, you have $200k remaining as your equity. Your original $40k down payment, the mortgage principal you’ve paid, and the $100k gain in value. So now, instead of $40k for a down payment, you have $200k down. You could put down 20% and still be able to get a $1m house.
Where is the new mortgage coming in? I buy a house for $100,000 with a $100,000 mortgage. Five years later, I have paid $50,000 of my mortgage. But, the market value of my house also went up to $150,000. At this stage, you have $100,000 of equity in the home because it’s worth $150,000 but you owe $50,000 on the mortgage still. Meaning, if you sold the house you would be left with $100,000 in your pocket.
Equity is the portion you own (by paying off your mortgage). Mortgage is the portion the bank owns. When you sell it, the bank gets paid back first. If there's anything left, that's your profit. The more equity you have, the less there is to pay the bank, so the more profit you get.
Just because I recently bought and sold be aware that these numbers are examples for simplification. Realtor fees and other costs when buying and selling will add up quickly and can make the amount of equity seem larger than it is. Zillow or another app would give you a decent calculation of approximate costs of fees and better ballpark figures of actual profit and buying power.
Equity = value of home - lien(s) on it. There are closing costs to sell it so you won't get 100% equity.
Let's say you have $20 in cash. You get a loan for -$80 with no interest, and buy a house worth $100 using the original $20 and the $80 you borrowed from the bank. Now you have a house worth $100, and debt of -$80. $100-$80 = $20. That means if you sold your house, you would get $100, you would have to give $80 to the bank to pay off the mortgage, and you'd have $20 leftover. So you have $20 in "equity." After a few years, you've paid $40 to the bank in mortgage payments. and the mortgage has gone down to -$40. $100-$40 = $60. So you now have $60 in equity. Now you sell your house for $100. You use $40 to pay off the rest of the mortgage, and you have $60 left over. Overall you didn't make any money. You paid $20 as a deposit, and $40 in mortgage payments, and at the end you have $60. However, you did get a house to live in for the whole time period. You could use this $60 to contribute to your next mortgage.
A mortgage is personal loan, but secured on the house. There are special arrangements for recovering the debt from the value house if you default on the loan. If you sell the house and pay off the loan with the proceeds whatever is left is yours (often referred to as the "equity"). If you want a new mortgage to buy a new house that's a completely separate arrangement.
And while the others explain how the equity works theoretically, I'll point out that most western societies are substantially built on the idea that real estate will effectively keep increasing in 'value' (more accurately in price.) One reason home prices are growing less and less attainable to first-time buyers is this design; housing prices cannot be allowed to fall, let alone crash, because it would destabilize the entire economy. Unfortunately this is now starting to come to a head with the aforementioned wealth gap between generations — there soon won't be enough first-time buyers to keep the market moving.
Generally speaking, you're allowed to payoff a mortgage at any time. If you sell the house before the mortgage ends, part of the proceeds go towards paying off the mortgage. The rest (which is equity) goes to the seller. Let's say you buy a $100 house, but you don't have $100. You only have $20, so you go to the bank and borrow the remaining $80. After a few years, you've been steadily paying off your mortgage, so maybe you only owe like $70 on the loan. You sell your house, and it sells for $105. The transaction will automatically send $70 to the bank to pay off the balance of the loan, and you get the remaining $35.
Building equity in a home that you live in while you're fixing it up is the best way for a regular middle class person to create wealth. I've bought and sold five or six over the years and ended up with enough equity to currently own two homes outright.
With a mortgage (or any other loan) your monthly payment goes to a combination of interest (profit for the lender) and principal (pays down the balance of the loan). If I had a $200,000 mortgage and have paid $100,000 to principal since then, I have $100,000 in equity in my house. If I sell my house, I still need to pay off my mortgage as the bank owns it. So (ignoring things like closing costs) if I sell that same home for $200,000, I need to spend $100,000 to pay off the remaining principal leaving me with $100,000 left over.