If you currently have, or are considering taking out a mortgage, then you might find yourself wondering how banks are able to offer mortgages. In a lot of cases, it seems that banks just offer loans and mortgages, so how are they able to make money off of these?
Well, as you probably already know, with every loan/mortgage that a bank offers, they are able to make money due to the repayment schedule. The value of the loan/mortgage that you take out will not be identical to the amount that you repay.
This is because you are charged an interest rate upon the money that you borrow. This is how banks make money on mortgages and loans.
But, before you take out a mortgage, you might be wanting to find out exactly how much money the bank will be making on your mortgage. In this guide, we’ll be answering this question, and lots more, so let’s get started.
As we have already established, yes, banks do make a profit on every mortgage that they offer. This is the way that banks have always operated, and it is the only reason that they are able to continue offering loans and mortgages.
Banks create new money with every loan/mortgage that they offer, in fact, this is the type of money that makes around 97% of the world’s wealth. Only a very small percentage (3%) of the world’s wealth is physical cash.
It can be very difficult to understand how this occurs, and this is mainly because banking in general is quite confusing. Banks are able to create new money with every loan that they offer because of the accounting that they use.
When you open your bank account and check your balance, the figure that you see on the screen doesn’t physically exist. There is not a safe deposit box labelled with your name holding the physical value of your bank balance. Instead, this figure is just an accounting entry on the bank’s computer.
The number that you see on the screen is not your own money, instead it is basically an IOU from the bank. If you were to try to take out your entire bank balance, then it is likely that the bank would have to request the funds, because most banks do not have a large amount of money at hand. Instead, banks have created a new type of money in the form of these IOUs.
This doesn’t clearly describe how banks are able to make a profit on mortgages, but you have to understand how banks operate to understand how they are able to make a profit. So, now let’s take a look at how banks make money on selling mortgages.
We have briefly touched on how banks are able to make money on selling mortgages, but now let’s take a deeper look at this.
As we have said, banks make money selling mortgages because of the repayment schedules and interest rates that they charge. When you take out a mortgage, you will be charged interest on top of this, either at a fixed or variable rate.
This interest will be calculated before you begin repaying your mortgage, and it will be added to your monthly repayment plan. Over the years, this interest will add up, and you will end up paying considerably more for your mortgage than the value of your home.
It is because of these interest rates that it is so important to do sufficient research before choosing a mortgage. Different lenders will offer different rates, and the length of time that it takes for you to repay your mortgage will impact the amount of interest that you pay too.
Generally speaking, most mortgages are offered with an initial fixed interest rate. In a lot of cases, people will stay with their lender for this fixed rate, and then switch. Due to this, you might expect the amount of money that banks are able to make on mortgages to be limited, but this isn’t the case.
As well as waiting for interest on repayments, there is another way for banks to make money selling mortgages. This is through selling mortgage loans for a commission, as this is a way to free up instant cash. But, how much money does a bank make on a mortgage? Let’s take a look.
Now, let’s answer the question that you have been asking, and take a look at how much money a bank actually makes on a mortgage.
As we have said, their main source of income on mortgages comes from interest rates, so it is impossible for us to give you an exact figure of how much money banks make on mortgages.
But, let’s take a look at some examples.
There are two types of interest rates that will be added to your mortgage repayments. They are the interest rate, and the origination fee. The origination fee will be charged upon completion, and the interest rate will be charged upon the monthly repayments.
The average cost of a house in the USA is around $380,000, so let’s calculate some examples based on this figure.
Origination fees are usually charged at a rate between 0.5 to 1% of the mortgage value. So, on a house valued at $380,000 you would pay $1900 if the origination fee is calculated at 0.5% and $3,800 at a rate of 1%.
The average interest rate on a mortgage in the USA is 3.99% on a 30 year fixed-rate mortgage. When you apply this interest rate to a mortgage of this type for a house with a value of $380,000, you would pay around $270,000 in interest.
So, banks really do make a considerable amount of money on mortgages.
In short, the amount of money that a bank will make upon a mortgage will depend on the interest rate at which that mortgage is taken out. In this guide, we have taken a look at some examples of the amount of money that a bank can make upon mortgages to help you.