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Hi, not educated in economics, but it seems like the banks mostly given out loans that are well below current rates and inflation. So that the money coming back in from home loans is tiny and worth less after inflation.
Isn't this bad financially for banks?
I asked someone this question who said it was no big deal, but I didn't comprehend their answer. Can anyone explain it to me like I'm 12 instead of 22! Thanks!
I think what you need to understand is called amortization. Loan payments are amortized such that early payments mostly apply to interest, that accumulates over time. On a typical 30 year level payment home mortgage, you will pay almost as much total interest as the original loan value (principal) Over the years the amount going to interest declines, and the amount appled to principal increases.
Take a look at this online calculator which graphically shows how the interest piles up over time, and the bank literally doubles its money.
Hi, not educated in economics, but it seems like the banks mostly given out loans that are well below current rates and inflation. So that the money coming back in from home loans is tiny and worth less after inflation.
Isn't this bad financially for banks?
I asked someone this question who said it was no big deal, but I didn't comprehend their answer. Can anyone explain it to me like I'm 12 instead of 22! Thanks!
90% of loans that are originated by banks are sold to Fannie/Freddie within 30 days. They don't keep them.
Hi, not educated in economics, but it seems like the banks mostly given out loans that are well below current rates and inflation. So that the money coming back in from home loans is tiny and worth less after inflation.
Isn't this bad financially for banks?
I asked someone this question who said it was no big deal, but I didn't comprehend their answer. Can anyone explain it to me like I'm 12 instead of 22! Thanks!
You need to explain what the heck you're talking about before anyone can give an answer that addresses your concerns. Be specific. What loans?
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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If you have a 30-year mortgage on a $500,000 loan with a 7.00% fixed interest rate, you’ll end up paying $697,544 in interest over the 30 year loan life. That’s more than what you borrowed in interest. So the bank will more than double their money, making the lower value of the funds insignificant. Most people sell and buy another house within 15 years, and during that time most of the payment goes to interest, very little to the principle. For example, with a monthly payment of $2,528.27, at the end of year 1 you would have paid only $4,470.90 on the principal, but $25,868.36 on interest. Then at year 15 it would be $11,079.92 paid on the principal, and $19,259.35 on interest.
Hi, not educated in economics, but it seems like the banks mostly given out loans that are well below current rates and inflation. So that the money coming back in from home loans is tiny and worth less after inflation.
Isn't this bad financially for banks?
I asked someone this question who said it was no big deal, but I didn't comprehend their answer. Can anyone explain it to me like I'm 12 instead of 22! Thanks!
This is like the saving & loan loan crisis many years ago. Look it up.
Sell 30 year loans paying 5%. But pay 12% or more for deposits. Back in the day get a toaster for your $1000. Many savings & loans went under.
Banks may be able to do other types of lending. Car loans at 10%. Equipment loans at 10%. Business loans at 12%. Today maybe pay 5% for deposits. Some pay 1% on checking.
Don't forget the credit card business. Get $35 per transaction. Get 25% on interest payments. Charge late & other fees.
If you have a 30-year mortgage on a $500,000 loan with a 7.00% fixed interest rate, you’ll end up paying $697,544 in interest over the 30 year loan life. That’s more than what you borrowed in interest. So the bank will more than double their money, making the lower value of the funds insignificant. Most people sell and buy another house within 15 years, and during that time most of the payment goes to interest, very little to the principle. For example, with a monthly payment of $2,528.27, at the end of year 1 you would have paid only $4,470.90 on the principal, but $25,868.36 on interest. Then at year 15 it would be $11,079.92 paid on the principal, and $19,259.35 on interest.
You're ignoring the time value of money.
You're also ignoring what the BANK paid for the money.
Most mortgage issuers sell the mortgages, so long term returns aren't even on their screen except for whether the buyers of the mortgages find them adequately attractive as investments.
You need to explain what the heck you're talking about before anyone can give an answer that addresses your concerns. Be specific. What loans?
Sorry, I'm not the best.
So...the banks have given out lots of loans in recent years and refinanced loans at like 3%.
So...it seems like the banks have a mountain of loans being repaid at 3% interest.
Fewer people are now buying homes at the new higher 8% interest rate. Inflation is still above (4% or so) the mountain of loans that the banks hold as assets at 3%. Plus we just had a year ago 9% inflation which that 4% is standing on top of.
Doesn't that hurt the financial stability of the bank to have such a large portion of its assets as mortgage loans at rates below inflation?
I'm sorry if this is an extremely stupid question.
Over half of mortgages are not made by typical banks, but by finance companies of various types. Those companies collect their assorted fees then package and resell the loans to banks and other investors. The price on those mortgages always reflects the going interest rates (e.g., mortgages with lower interest rates will cost less in a higher interest rate market). Lenders may sell the mortgages but retain the payment processing, for a fee. Mortgage payments made to banks often go elsewhere after the bank collects them.
So...the banks have given out lots of loans in recent years and refinanced loans at like 3%.
So...it seems like the banks have a mountain of loans being repaid at 3% interest.
Fewer people are now buying homes at the new higher 8% interest rate. Inflation is still above (4% or so) the mountain of loans that the banks hold as assets at 3%. Plus we just had a year ago 9% inflation which that 4% is standing on top of.
Doesn't that hurt the financial stability of the bank to have such a large portion of its assets as mortgage loans at rates below inflation?
I'm sorry if this is an extremely stupid question.
Thanks for explaining your question better. Your question isn't stupid. It just wasn't clearly explained in your first post.
To answer your question, YES, if the bank is holding a lot of mortgages at 3% interest rate and the current rates are considerably higher than that, then that is not good for the bank's financial situation. However, keep in mind that some banks sell a large portion of their mortgages to financial markets almost as soon as they make the mortgage. In these cases, the bank is no longer the owner/holder of the mortgage and therefore it is not a drag on their business. It would then be the problem of whomever bought the mortgage from the bank.
Typically, these type mortgages are bundled and sold in large quantities on the financial markets. However, there are still some banks who hold the mortgages that they make. These would be the banks that get hurt in the situation you describe.
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