How Banks Make Money from Home Loans
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What the Frac?
How banks make money from home loans.
Fractional Reserve Banking refers to a banking system which requires the commercial banks to keep only a portion of the money deposited with them as reserves. The bank pays interest on all deposits made by its customers and uses the deposited money to make new loans.
How it works in Practice.
1. John deposits $10,000 into Bank A.
2. Bank A keeps 10% ($1,000) as reserves, and loans out the rest 90% ($9,000) to Jane
3. Jane deposits $9,000 into Bank B
4. $10,000 (John’s deposit) + $9,000 (Jane’s deposit). The banks just created $19,000 on a $10,000 deposit in just a few steps.
5. If you do this operation 50 times, John’s initial $10,000 turns into $99,525!
As the amount of money kept in the bank is generally only a little fraction of the deposit, bank runs can occur when large numbers of people demand their deposit, causing banks to become insolvent, unless the central bank intervenes.
Total debt on home loans.
According to the Fed, total mortgage debt outstanding currently stands at $13.4 trillion.
Mortgage debt by property type is:
- One-to-four family residences (76%)
- Multi-family residences (6%)
- Non-farm non-residential (17%)
- Farm (1%)
Mortgage debt by holder type:
- 32.8% major financial institution
- 7.4% individual / others
- 37.7% federal / related agencies
- 22.1% mortgage pools or trusts
For more information on how you can save money on your home loan visit our homepage.