Understanding Debt - Mortgages
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Credit was introduced a long time ago to facilitate trade. However, along the way Banks rapidly realized that personal credit would help business and of course make them a nice profit. When you borrow money from a lender like a bank or savings and Loan Company, they create the money when you borrow it. There are certain perimeters that restrict their total freedom in this respect, but overall that little blip on the computer screen suddenly materializes as $100,000. The money supply has increased by $100,000. The more money in the supply, the more to go around. However, if there is too much it begins to lose value as prices rise. This is called inflation.
Interest payments: Banks are very successful businesses. They are there to make a profit and a very handsome one at that! For instance turnover for the Chase Manhattan banking conglomerate grew from $4, 466 billion dollars in 2004 to $15,365 billion in 2007. That is almost a three-fold increase. Let’s say you go along to a banking giant like this one in order to take out a mortgage. You have bought a modest house and you want to get a mortgage for $100,000. Of course you have to make a down payment, but as the overall cost of the property was $120,000 you have given them $20,000 from savings to cover that! The bank agrees to lend you the money over a thirty-year period at 8.25%. It is a fixed rate mortgage, so you expect it to remain steady at this percentage until completion. The bank does its math and tells you that your monthly repayments will be $751.27. Now you do the math! You have borrowed $100,000 over thirty years at a repayment rate as outlined above. How much is your house going to cost you? Answer $270,456.00. Thus you have just entered a contract to buy a property for $100,000 but it is really going to cost you almost three times that amount. That is the power of compound interest!
The bank created $100,000: On agreeing to accept you as a mortgage customer; the bank then created $100,00, which is added to the money supply. You or subsequent owners of the property are now eligible for $170,456 by way of interest. That does not come from a blip on the computer screen; you have to find that sum by way of earnings in the existing money supply. It’s an interesting concept isn’t it? The bank makes a lot of money from you by loaning you money against property that is a secured loan. You usually pay a bit less interest in the case of secured loans because they can come and foreclose on you and then take the property back, which they can sell and get back some of what you apparently owe, At the moment 1 out of every 100 mortgages in the US is in foreclosure and 20% of all mortgages are in arrears. In fact as they created the money in the first place, they have lost nothing and anything they make after administrative costs is simply pure profit. Not many of us have the money to pay cash for property, thus at the moment there is not very much you can do about this one except understand the phenomenon. Notwithstanding property purchase is considered good debt as houses historically rise in value over time.
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