how does the mortgage work ?

Question

If you buy a home for lets say 100,000 and pay mortgage on it each month lets say 2,000, and then you sell the home 3 month after purchase, and made total of 6,000 in payments so far. Would you now owe the bank only around 94000 dollars and you can keep the 6000?
(I did not consider the interest rate and other fees in my example, I am just wondering how it works in general)

forgot to mention that the house was sold for the same price 100,000

Answer 1

It really depends on the mortgage, since different mortgages have different terms. For this example, let's say you have a 30 year fixed rate mortgage at 6%. The required payment on this would be $600. In the first 6 months of the loan, you will have only paid down a total of $659.27 in principal. Mortgage payments are calculated so that the bulk of the interest in paid up front, and the principal is paid on the back end. On a conventional 30 year loan, you have to wait a little over 18 years before the portion of your payment allocated towards principal becomes greater than the portion of your payment that is allocated towards interest. The reason this is done is because the average American refinances every 5-7 years. Because of this, lenders need to have mostly interest paid during the initial years of the loan in order to stay profitable. If you pay more than the required payment, then that would decrease the amount of principal owed, and therefore reduce the amount of the payoff at the time you sell the home.

Answer 2

The word "mortgage" comes from the French language. It means "dead hand." Meaning, unlike hired hands, it doesn't do any work around the farm...

You are essentially paying for the use of someone else's money. The principal is the money the lender gives you. The interest is what you pay the lender for the use of the lender's money. On most loans, they like to get the interest back quickly, and early payments generally cover only interest on traditional loans for the first several years. After that, payments go to cover principal.

But now days there are very complex loans, such as the interest-only loans (can you say danger! danger!). Only the amount of money you have paid on the principal and the increase in market value of your home can be considered your equity. Then there's balloon loans, and creative loans, and just plain loan-sharking.

I agree with anybody who says you should study this, preferably before signing for a loan. And remember, a few percentage points of interest, through the life of a loan, can easily double the cost of a house purchase.

Don't feel too bad if you appear to have lost some money on the deal. I assumed three loans on my first house, which I paid off. One of the loans was a Carter era 22%. I doubt the previous owner had ever paid anything but interest on it, and it probably would never have been paid off at the rate they were going.
So don't cry. It could be worse.

Answer 3

When you make any payment on time, the interest is added each month to the principal, and then your payment is deducted.

Let's use some easy numbers:

100,000 principal.
6% simple interest (yours will be compound, but this is easier)

Each month, the bank charges you 0.5% interest (6% per year over 12 months gives 0.5% per month ).

Month one - 100,000 * 0.005 = 500.00
Payment of 2000.00
Principal becomes 100,000 + 500.00 - 2000.00 = 98,500

Month two, your interest would only be 492.50, so after your payment, you'd actually owe 96992.50

Moth three, the interest is 484.96, and your principal after payment would be reduced to 95477.46.

If you sell the house on the same day the payment is due, for that same 100,000, you get to pocket $4522.54

Don't forget, there will be points, origination fees, title transfer fees, real-estate commissions, etc...so you'll probably end up with nothing.

Answer 4

You have the basic idea and I wish it was that easy, but it gets complicated because the bank is looking to make their money. To stay with in your scenerio when you pay off your mortgage you will be paying $2,000 a month which is split by the bank as money owed and interest. So to follow your case you maybe paying $6000 over three months but $2000 maybe be on the actual loan and $4000 maybe be just paying off interest. Depending on loan type you might be paying interest only.

Plus the bank may(will) have a clause in the loan that you have to you pay more, if you pay off the loan early. I hope that didn't complicate things more, but i hope it helps as a general answer.
good luck.

Answer 5

No, you would still owe the bank about $99,700, if you are lucky. It's not a simple question. It depends on your interest rate. Also, you have closing costs and, usually, a stiff real estate commission. It would probably help you to find one of the free courses local banks/realtors offer to prospective (first-time) home buyers. You would receive a wealth of information that would help you in your purchase and eventual sale of your home.

Good luck!

Answer 6

Most of your money goes to interest at the start of a loan. So you would not recapture the 6k. However we can structure a mortgage that in the first three month you only make one payment. To read more about mortgages go to the web site below.

Matt

http://www.minnesota-mortgage-rates.net/

Answer 7

No. You don't KEEP anything. You have paid in $6,000, thus your mortgage balance would be reduced by approximately that amount, and you would still owe the outstanding balance to the mortgage company. If you used a realtor, you would also owe the commission, and some other costs.

Answer 8

I found some good info here.

Answer 9

you take money from the bank then after a period of year they take more of it