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| *Ostroff, Fair and Company>>>Personal Finance |
Why does the bank make so much interest? |
So if you buy a house for 150,000 on a 30 year 7% mortgage, you end up paying about 360,000 dollars total. So that's 210,000 in interest? Does anybody else think this is outrageous? I understand the bank is taking a risk and needs a return on it's investment, but come on. Am I the only one? The bank lends money to make money, simple as that. That's why people are in debt to their wazoo!! The rich get richer... It's the American way... It's all based on prime. The truth is banks and grocery stores are the two business that make the least amount of money in the U.S. Well, they take the risk that you might not pay for the house. They had to give someone all that money up front so they can't invest it elsewhere where it can make them more money so they charge you interest. You can mitigate that by paying extra on the principle of loan each month and save $1000's of dollars on the interest as well as taking years off the loan. there's a risk premium & a time value premium (the dollar you borrow today is worth less than the dollar you payback tomorrow so in order to get the full dollar back plus an ROI, it charges interest). FYI, mortgage rates are typically set by the broader market not the individual bank, since most mortgages end up getting packaged & sold to investors. don't overlook the benefit of paying the mortgage interest, since you can deduct it on your income taxes, plus if you pay more principal each month than required, you'll end up paying less in interest over the long run. If you don;t like it, don't do it. No one can make you sign the note. No one stays in their same loan for 30 years anyway (well if they do it is a very, very small percentage of borrowers). Few banks retain their loans in any case so the profit goes to the investor. Look at it this way. You borrow $150,000 at 7% on a 30 year loan. That means that money is tied up for as long as 30 years at 7%. If rates increase to 7.5% the lender is now losing 1/2 a percentage point on that money. If rates decrease to 6.5% they make 1/2. They gamble that the projected return will be profitable. That is why you saw so many banks go out of business in the 70's went rates when through the roof. All their money was tied up in lower rate receivables. It is called profit and it is the heart of a capitalistic enterprise. |
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