About the mortgage and bank credits

I didn't have access to internet yesterday thus I am posting my article today.

Let's say that you want to build or buy a house and you need a lot of money which you don't have. It is rather unusual that your friends will lend you it thus you will have to go to the bank. Of course the bank will charge you interest on the loan for some 20-30 years and by the time you pay off your house, the interest accumulated over the 30 years will be almost equal to the initial loan. But apart from some inconveniences in the end it has some benefits:
- you have your own house in which you can do what ever you want;
- your house should increase the market value over the time which should give you extra profit if you decide to sell it;
- you don't have to rent a house in which you are limited of what you can do and you loose the money because it goes to the owner of the house.

But within this whole process of lending the money from the bank there is an amazing fact. You are working your ass off to pay interest to the bank on the money which don't exist and are not real. I know that in the moment of getting approval for the loan you can ask bank to give you the cash but still this doesn't happen too often. It is usually done in the electronic form and you never see the cash. And the same with the seller of the house from whom you buy. He doesn't see the cash either. If he really needs it and he insists then he can walk out of the bank with the real cash in his bag but it is rather unusual that he would keep it at home. He will rather keep it in his bank account which gives him profit in the form of interest or he will try to invest in another way ( e.g. stock market ) but it doesn't change much because the money will get back to the banking sector which in some way is interconnected all over the world and it is controlled by world bank. And once the seller of the house puts the money in his bank account, then the bank can loan this money again to another person who wants to buy another house. And in this way the banks are charging interest ( for the base loan ) from different people. And for example 5 different people buy a house each worth 500.000 $ altogether and the money which pays for all of it is 100.000 $. Of course this is greatly simplified because a person applying for the loan must pay some deposit ( e.g 20.000 $ ) but still the fact is that the banks lend the same money to pay for various houses and charge interest for it from different people.

To be continued...



Published: 2012 - December - 28      © Copyright 2012 - Greg Wiater