How Banks Make Money From Home Loan Infographic
Have you ever been curious about how banks make money?
There are several ways how banks can generate money, including from service charges.
Moreover, banks can also make money from giving home loans, which we will discuss further in this article.
Banking System
One banking system that allows banks to make money is Fraction Reserve Banking.
It is a banking system that requires commercial banks to keep only a portion of the money deposited as reserves.
Banks will pay interest on all deposits made by their customers. Later, they use the rest of the deposited money to make new loans.
How Does the Banking System Work?
How does the Fraction Reserve Banking system work in practice?
Let us give you the example below.
- For example, John deposits $10,000 in Bank A.
- Bank A keeps 10% ($1,000) as reserves and loans the rest 90% ($9,000) to Jane.
- Jane deposits $9,000 in Bank B
- Bank A has $10,000 from John’s deposit, and Bank B has $9,000 from Jane’s.
The banks created $19,000 based on a $10,000 deposit in just a few steps.
- If they do this operation 50 times, John’s initial $10,000 turns into $99,525!
Total Debt on Home Loans
In a nutshell, a home loan is financial aid for people to purchase their homes.
As it needs a tremendous amount of money to pay for a house, the repayment tenor for this type of loan is commonly long.
The total mortgage debt outstanding currently stands at $13,4 trillion.
The mortgage debt by property types are:
76% of one-to-four family residences
16,5% nonfarm, nonresidential
6,3% of multi-family residences
0,98% farm
Closing
Banks are an inseparable part of people’s daily life, as people receive their payments via bank accounts.
Many of our daily transactions also require the roles of banks, from paying bills and using credit cards to requesting loans.
Banks can help get temporary financial aid. Still, one should be careful before taking long-term loans.
Learn the following infographic about how banks make money from home loans.
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