I’ve heard this argument many times, both in real life and on social media. If you have a mortgage (or two), you don’t actually own your home.
The logic is that the bank/lender actually owns the property because it lent you the money to buy the property.
You must pay them every month for the right to continue living in the home. If you don’t, they have the right to repossess the property through the foreclosure process.
Furthermore, many homebuyers only pay 3-5%, which means borrowers technically own too little and owe too much to the bank.
Is it true that mortgage holders do not actually own their homes?
You still have items tied to the loans
While there is some logic to the idea that a home with loans attached isn’t really a home. OwnedIt’s a very abstract idea.
Sure, one could argue that if you have a mortgage, that means you only own the paid-off portion.
For example, if you buy a home for $500,000 and put down 20%, you only have $100,000 in equity, also known as home equity.
When people refer to equity, they mean the portion of your estate that has been paid off, or simply the current value minus any outstanding liens.
Over time, that same $500,000 property will likely appreciate in value, and the loan will be paid off.
This means that the equity will increase over time and with each monthly payment, with a portion of it going toward paying off the principal balance.
But it’s starting to become a matter of semantics about what ownership really is. It serves no great purpose to question it.
Homeowners refinance their properties and still own them.
Take another example. The property is owned free and clear, meaning there is no mortgage. The borrower then decides to apply for a cash-out refinancing.
Their estate is worth $1 million and they decide to withdraw $400,000 to use for other expenses.
Does that mean they owned their house and now they don’t own their house? No, that would be a ridiculous idea.
This simply means that they did not have loans on their property and now they have a loan. Their shares fell from $1 million to $600,000.
What it means is that they will have to make monthly mortgage payments to the bank or lender until the loan is paid off.
This means they will receive less revenue if they decide to sell the property (since they will need to pay off the loan balance in the process).
But this does not change the fact that the property is still in their name and owned by them.
Certain rules apply if you have a mortgage
While I don’t agree that you don’t have it if you have a mortgage argument, there are some rules that apply if you’ve taken out a home loan.
First, risk insurance is mandatory. Since the lender has a financial interest in your property (through this senior mortgage), they want protection.
This means an insurance policy to protect them if something happens to them. They assume that you will not repay their loan if the house is destroyed.
So they need insurance to protect themselves from any major losses.
If you own your property free and clear, you can technically waive the insurance requirement.
though? Probably not, unless the property is worth next to nothing.
The lender may also have restrictions if you want to place the property in a trust, because again, they have an interest in the home.
Rich people often get mortgages even though they don’t need them
There’s something else to consider when it comes to mortgages and ownership.
It is very common for wealthy people to take out mortgages on the homes they own, even if they have the money to pay it off in full.
Ultimately, a mortgage is a cheap form of financing (even if mortgage rates are no longer at record lows).
This provides an opportunity for the wealthy to leverage their assets to make greater profits elsewhere.
There are countless examples. In 2011, Facebook founder Mark Zuckerberg took out a $5.95 million mortgage to buy a $7 million home in Palo Alto, California.
We all know we could have paid all cash for the house, but he chose not to. Maybe because the loan is set at 1.75% and it wouldn’t take much to beat that rate of return.
Remember that a mortgage can be viewed as an investment and its interest rate is the rate of return.
So, if you have a mortgage at 3% and a typical savings account that pays 5%, you may actually be ahead by not paying it off early.
Other examples include Jay-Z and Beyoncé’s $52.8 million mortgage on their Bel Air home.
Warren Buffett says it was a great time to get a long-term mortgage in 2013 when interest rates were at historic lows.
Ultimately, a home loan is just a financial vehicle that the borrower can use to allocate money elsewhere.
This does not mean that they do not own their home. It simply means that they prefer to borrow rather than repay their property, which is arguably an illiquid investment.
Ultimately, this myth is often perpetuated by people who would rather rent than buy.
There’s not a lot of truth to this, and it actually only makes home ownership seem less attractive than it really is.
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