how can banks loan tons of $$ up front n still make $$ when we only pay fractions of the $$ back in interest?

Question

let say ur a bank n u loan joe $600k to buy a house at 5% interest. joe pays u interest+principle over 30yrs. how can u still make $$ if joe only pays u back, say, $1000 a mo. when ur alrdy out $600k up front. in addition, ur lending more $$$ to other ppl as well n they, like joe, r only paying u fractions of what they owe over the course of 30yrs. u hv to be a gazillionaire to do this kind of biz. i just don't understand how banks (or credit card co.) make $$$ by doing this.

Answer 1

Good question. What have hit upon is related to two points, Asset and Liability matching and leverage.
In simple terms if a bank makes a 5 year car loan they match that asset with a 3 year liability(promise to pay). The average loan is paid off before the full term. That is due to amortizaiton (principle paydown) and prepayment in full, so for a 5 year loan the bank only needs 3 years of funds. Customers trade in thier car early or send extra payments.
So the bank borrows money for three years, say by issuing a CD to a customer at 5% interest, then loaning the money at 9%.
So the bank does have to have some of the outstanding loans in reserve, say 8%.
Just like Kmart, if they can buy socks for $4 and sell them for $6and the $2 is enough to cover expenses and profit, then you are OK.

Answer 2

You'd be surpised at how much money revolves around just 1 or 2%. Over a 30yr mortgage a 600K loan will cost joe around a million. a 600k mortgage will have a payment closer to 3000+ Mortgages are armortized which means that you pay most of the interest during the early years of the loan. a 1000 montly payment may be 900 interest and 100 to principal.

Answer 3

if Joe pays 1000 a month for 30yrs the bank makes 360,000 in intrest if Joe was paying a 1000 a month it must be an intrest only loan and he still will owe 600k at the end of the 30yr. ok if he was paying a amortizing loan he would be paying 3220.96 w/o insurance .and that is how bank make money