If I have a $500,000 mortgage, and my assets (including equity) only sum to $400,000, then I’m $100,000 in debt. If I make $12,000 a month, and my mortgage payment is $4,000, then I have $8,000 a month to spend. I’m in debt, but I don’t think anyone would call me broke.
The key point in your scenario is that you don’t have money to spend, not that you’re in debt.
Having a debt is not the same as being in debt. In your example, you have equity, which means you are positive in assets. Being in debt is negative assets.
Home ownership is falling which is likely a big part of being in debt for many. Their rent pays for someone else’s asset.
In my example, the total of the assets I own is less than the total debt I have. That means my net worth is negative. By any definition, that means I’m in debt.
Again, being broke means not having money to spend. I can be in debt and I can be broke, or any combination of the two, or neither.
I don’t think I’m understanding your example then. Is this mortgage for more than the value of the home? How do you have equity then?
With a mortgage, the whole home is owned, and assets are always more than debt, for that loan. The fact you say equity implied to me that the home is worth more than the mortgage. I thought you just didn’t lisbthe home asset, which is odd.
Sometimes the value of a house drops and the loan is now more than the house. In that case they’d be considered in debt.
I don’t disagree with the distinction between being in debt and being broke.
Yes, the mortgage is worth more than the home in my example. I guess I shouldn’t have said “(including equity)” or I should have said “my assets and debts”, since to be in that case, I either don’t have equity in the home or have other debts that surpass my equity. The mortgage is $500,000 and the house plus all my other assets and minus all my other debt is worth $400,000.
In your original example though, you weren’t in debt but you had no money to spend, so that’s broke and not in debt.
Personally, I consider being “in debt” to mean having a debt. It wouldn’t matter if the home was worth more than the mortgage, I’m still in debt on that mortgage. If my assets are worth less than my debts, I would call that “insolvent”. But neither of those conditions mean that you’re broke. As long as you have a reliable income stream that can cover your payments on your debts and other expenses, you’re not broke.
Ok, well in your example, I wouldn’t call you broke either, as the debt is currently managed. However I’d call it high risk and I’d call your mortgage underwater. Your debts are more than your assets, so any disruption to pay, like losing your income or having an illness, or damage not covered by insurance and you would be in big trouble. Thats living beyond your means.
Usually the only reason debts would be higher than assets is a drop in home value or taking on too much debt in other areas. That’s pretty much what OP was asking. Why so much debt? Do you think it’s high risk?
I want to be clear that that was a hypothetical. And yes, it’s a precarious financial situation. But my point was that indebt!=broke, which it sounds like we agree on.
They often go hand in hand but are not the same. However, the point remains, that if the bank is giving money to cover spending you can’t afford and you’re in negative equity, you should be broke but aren’t, on someone else’s dime. So it’s not really different from the child who is broke and parents pay for everything.
I don’t know that your example is real though as I think banks wouldn’t lend in that fashion, or at least shouldn’t. It can happen when there is a housing crash. I think a large part that people are becoming broke is they are not accumulating assets from their pay. It goes on interest and rent. Historically it went to mortgage payments and people were more likely to own than rent,
If I have a $500,000 mortgage, and my assets (including equity) only sum to $400,000, then I’m $100,000 in debt. If I make $12,000 a month, and my mortgage payment is $4,000, then I have $8,000 a month to spend. I’m in debt, but I don’t think anyone would call me broke.
The key point in your scenario is that you don’t have money to spend, not that you’re in debt.
Having a debt is not the same as being in debt. In your example, you have equity, which means you are positive in assets. Being in debt is negative assets.
Home ownership is falling which is likely a big part of being in debt for many. Their rent pays for someone else’s asset.
In my example, the total of the assets I own is less than the total debt I have. That means my net worth is negative. By any definition, that means I’m in debt.
Again, being broke means not having money to spend. I can be in debt and I can be broke, or any combination of the two, or neither.
I don’t think I’m understanding your example then. Is this mortgage for more than the value of the home? How do you have equity then?
With a mortgage, the whole home is owned, and assets are always more than debt, for that loan. The fact you say equity implied to me that the home is worth more than the mortgage. I thought you just didn’t lisbthe home asset, which is odd.
Sometimes the value of a house drops and the loan is now more than the house. In that case they’d be considered in debt.
I don’t disagree with the distinction between being in debt and being broke.
Yes, the mortgage is worth more than the home in my example. I guess I shouldn’t have said “(including equity)” or I should have said “my assets and debts”, since to be in that case, I either don’t have equity in the home or have other debts that surpass my equity. The mortgage is $500,000 and the house plus all my other assets and minus all my other debt is worth $400,000.
In your original example though, you weren’t in debt but you had no money to spend, so that’s broke and not in debt.
Personally, I consider being “in debt” to mean having a debt. It wouldn’t matter if the home was worth more than the mortgage, I’m still in debt on that mortgage. If my assets are worth less than my debts, I would call that “insolvent”. But neither of those conditions mean that you’re broke. As long as you have a reliable income stream that can cover your payments on your debts and other expenses, you’re not broke.
Ok, well in your example, I wouldn’t call you broke either, as the debt is currently managed. However I’d call it high risk and I’d call your mortgage underwater. Your debts are more than your assets, so any disruption to pay, like losing your income or having an illness, or damage not covered by insurance and you would be in big trouble. Thats living beyond your means.
Usually the only reason debts would be higher than assets is a drop in home value or taking on too much debt in other areas. That’s pretty much what OP was asking. Why so much debt? Do you think it’s high risk?
I want to be clear that that was a hypothetical. And yes, it’s a precarious financial situation. But my point was that
in debt != broke, which it sounds like we agree on.They often go hand in hand but are not the same. However, the point remains, that if the bank is giving money to cover spending you can’t afford and you’re in negative equity, you should be broke but aren’t, on someone else’s dime. So it’s not really different from the child who is broke and parents pay for everything.
I don’t know that your example is real though as I think banks wouldn’t lend in that fashion, or at least shouldn’t. It can happen when there is a housing crash. I think a large part that people are becoming broke is they are not accumulating assets from their pay. It goes on interest and rent. Historically it went to mortgage payments and people were more likely to own than rent,