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If I Have a Mortgage, Do I Actually Own My House?

bank owned

I’ve heard this argument many times, whether in real life or on social media. That if you hold a mortgage (or two), you don’t actually OWN your house.

The logic is that the bank/lender is the one that truly owns the property because they lent you the money to purchase the property.

And you must pay them each month for the right to continue living in the home. If you don’t, they have the right to repossess the property via the foreclosure process.

On top of that, many home buyers only put down 3-5%, meaning borrowers technically own very little and owe a whole lot to the bank.

So is it true that mortgage holders don’t actually own their homes?

You Still Own Things That Have Loans Attached

While there’s some logic to the idea that a home with loans attached isn’t truly owned, it’s a pretty abstract thought.

Sure, one can argue that if you have a mortgage, it means you only OWN the portion that is paid off.

For example, if you bought a house for $500,000 and put down 20%, you’ve only got $100,000 in ownership, also known as home equity.

When people refer to equity, it means the part of your real estate that is paid off, or simply the present value minus any outstanding liens.

Over time, this same $500,000 property will likely appreciate in value, and the loan will be paid down.

This means ownership will increase as time goes on and with each monthly payment, with a portion going toward the principal balance.

But it starts to become a matter of semantics for what ownership truly is. And it doesn’t serve much purpose to question it.

Homeowners Refi Their Properties and Still Own Them

Take another example. A property is owned free and clear, meaning there isn’t a mortgage. Then the borrower decides to apply for a cash out refinance.

Their property is worth $1,000,000 and they decide to pull out $400,000 to use for other expenses.

Does this mean they owned their home and now they don’t own their home? No, that would be a silly thought.

It simply means they had no loans on their property and now they have a loan. And that their equity fell from $1 million to $600,000.

What is does mean is they’ll have to make monthly mortgage payments to a bank or lender until the loan is paid off.

And it does mean they’ll receive less proceeds if they decide to sell the property (since they’ll need to repay the loan balance in the process).

But it doesn’t change the fact that the property is still in their name and owned by them.

Certain Rules Do Apply If You Have a Mortgage

While I don’t buy into the you don’t own it if you have a mortgage argument, there are some rules that apply if you’ve got a home loan.

For one, hazard insurance is compulsory. Since the lender does have a financial interest in your property (via that big mortgage), they want protection.

This means an insurance policy to protect them if something happens to it. They assume you won’t pay off their loan if the house is destroyed.

So they require insurance to shield themselves from any big losses.

If you happened to own your property free and clear, you could technically forgo the insurance requirement.

Would you though? Probably not unless the property was worth next to nothing.

The lender may also have restrictions if you wish to put the property into a trust, because again, they have an interest in the home.

Rich People Often Take Out Mortgages Even Though They Don’t Need Them

One more thing to consider when it comes to mortgages and ownership.

It’s very common for the ultra-rich to take out mortgages on the homes they OWN, even if they’ve got the money to pay them off in full.

Ultimately, mortgages are a cheap form of financing (even if mortgage rates are no longer at record lows).

This provides opportunity for the wealthy to leverage their property to generate bigger profits elsewhere.

There are countless examples. Back in 2011, Facebook founder Mark Zuckerberg took out a $5.95 million mortgage on his $7 million Palo Alto, California home purchase.

We all know we could have paid all cash for the home, but he chose not to. Probably because the loan was set at 1.75% and it wouldn’t take much to beat that rate of return.

Remember, a mortgage can be viewed as an investment and its interest rate as the rate of return.

So if you have a 3% mortgage and a typical savings account pays 5%, you could already be ahead by not paying it off early.

Other examples include Jay-Z and Beyoncé’s $52.8 million-dollar mortgage on their Bel Air home.

And Warren Buffett arguing that it was a great time to take out a long-term mortgage in 2013 when rates were at historic lows.

Ultimately, a home loan is just a financial vehicle that can be used by a borrower to allocate money elsewhere.

It doesn’t mean they don’t own their home. It simply means they prefer to borrow instead of paying off their property, which arguably is an illiquid investment.

At the end of the day, this myth is often perpetuated by people who prefer to rent instead of buy.

There’s not a lot of truth to it, and it really only serves to make homeownership look less attractive than it really is.

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