How Mortgages Work?

An art understand the chaos of the current economic crisis. We began with the market that calls at all the housing market and to unravel what what's wrong with the housing market we first need to tackle a very simple question. How do people purchase homes? Well in this podcast I'll be giving you a basic overview of how the system works? And what exactly the bank does to help people purchase mortgage start of.

Let's begin with a very simple situation. Let’s take the case of a man. And this man has money and he wants to save it. He has several options and one of them is to hide this money underneath his bed. But there's an issue here and issue is inflation, a time when prices rise. Well the problem is that prices would start increasing for basic items such as food and clothing and thus make the money that was saved under the bed seem like a small now. Because it wouldn't be increasing at the same pace of goods and the outside market the result is that this man would be getting less bang for his buck.

So what does a person do? Well he can go to a bank and deposit his money in a savings account. I'm like under his bed the money doesn't just sit there in fact the bank is actually borrowing this money to finance their other activities and returned to for borrowing this money they pay this man interest. Remember what I said was the definition interest a fee for borrowed cash for me. I was always intrigued by this idea of where that money came from? It seemed too good to be true that just putting your money in a bank could yield small interest to understand.

Where exactly money has come from? We must go the other side have the equation and look at the case have a typical family. They want to buy house. The problem is that the house cost 250,000 dollars. Now very few people can afford to pay two hundred and fifty thousand dollars up front for house. Well a commercial bank has access to a lot of money because it had all that money from savings account and want pull that money together. It has a substantial amount. An amount that's good enough to buy a home. And so because the commercial bank has access to large pools of money it agrees to serve as an intermediary between a family and home and so they stay forefront the two hundred and fifty thousand dollars to fight the house.

In return they give the family a mortgage. Under a traditional markets the family goes to restrict and rigorous pre-approval process with the bank. Whereby if they qualify for the markets to pay the bank back in small monthly payments. Now because these payments are show small they typically take years to pay off. In this case the family would finish paying back their mortgage in 30 years. Now you're asking why it takes so long to pay back. Well it's because mortgages are very expensive. You want to see family pays back their bank. their payments are divided into two parts, principal which is the original I'm portion of the loan that you owe a pink at the example we discuss that's the two hundred and fifty thousand dollars that the bank paid up front for the house and interest that for feed that you have to pay the bank for borrowing their two hundred fifty thousand dollars.

In the first place what most people don't realize is 'how large that can be?' in the overall scheme of things every month this family would pay down the principal and it would accumulate. I'm told they would be able to cover the entire cost to the house until they do. That however they start off with high interest payments and as they pay down their principal there interest gets lower and lower. In many cases interest can make up more than half total market payments. for example let's assume that this family had an interest rate of 6 percent assuming their mortgage took thirty years to pay off the house would cost in total 539,000, dollars that's over twice the value of what the house was listed for at market price.

So how are homeowners connected to that man he decided to take the money from under his bed and put it in a savings account well the commercial bank pulls together all the money usually from savings accounts to buy that house. Then they charge the homeowner 6 percent from running the money. The homeowners pay back their six percent and then the bank think about the man with the savings account by giving him one percent interest. Than the banks are the ones that ultimately get to keep that 5 percent difference. So that's how families buy houses. People make interest of a savings account and banks make money to review a person puts money in their savings account. Banks use that money to front money for homes. Homeowners pay back thanks with a lot of interest over a long period of time. Banks use a small part of that interest to reward people with savings accounts. And this is how the mortgage works.