Not entirely true. I’m what they call a deadbeat (meaning I pay off my cards in full every month and have been doing so for the past 10 years, making them $0 profit), and I have a 800 score.
I think the more correct way to think about it is that it’s an estimate of your profit potential. What everyone tells you to do with a score this high is to buy a house because you qualify for the best mortgage interest rates. But of course then they’ll have me on the hook for the next 30 years, and they stand to make in excess of $100k in profit.
It’s actually far worse than that. If you get $400k loan at the current rate and pay it off over 30 years, you’ll end up paying over 1.5x times the principal in interest. Over the lifetime of the loan, a $500k home will cost you over $1M.
Wait why are the banks investing in home loans when instead investing that money into the stock market (should?) yield greater returns over the course of the loan period (even at a very conservative 5% yearly compounding interest, $400,000 turns into $1.7M over the course of 30 years)
Mortgages are fixed income. Stock market returns are variable and therefore riskier. One bad year can wipe out multiple years of gains. Meanwhile, the money you collect as interest has already been paid, and as you can see from the calculator, the interest is front loaded, meaning the majority of it is paid at the beginning of the loan. So even with the probability of a default wiping out the remainder that’s owed, it’s still a much safer investment.
What is your proposed alternative system? All of this is just an interest rate applied to an outstanding balance. Many less people would own a house without such an option.
Yeah my parents are vehemently against borrowing money except for a mortgage. Otherwise, how will you save several hundred thousand dollars or more to buy a house in full? Most people can’t do that, even over decades.
Not entirely true. I’m what they call a deadbeat (meaning I pay off my cards in full every month and have been doing so for the past 10 years, making them $0 profit), and I have a 800 score.
I think the more correct way to think about it is that it’s an estimate of your profit potential. What everyone tells you to do with a score this high is to buy a house because you qualify for the best mortgage interest rates. But of course then they’ll have me on the hook for the next 30 years, and they stand to make in excess of $100k in profit.
100K profit on a mortgage? that’s insane
It’s actually far worse than that. If you get $400k loan at the current rate and pay it off over 30 years, you’ll end up paying over 1.5x times the principal in interest. Over the lifetime of the loan, a $500k home will cost you over $1M.
(from mortgagecalculator.org)
Wait why are the banks investing in home loans when instead investing that money into the stock market (should?) yield greater returns over the course of the loan period (even at a very conservative 5% yearly compounding interest, $400,000 turns into $1.7M over the course of 30 years)
Mortgages are fixed income. Stock market returns are variable and therefore riskier. One bad year can wipe out multiple years of gains. Meanwhile, the money you collect as interest has already been paid, and as you can see from the calculator, the interest is front loaded, meaning the majority of it is paid at the beginning of the loan. So even with the probability of a default wiping out the remainder that’s owed, it’s still a much safer investment.
Why aren’t these practices considered criminal?
What is your proposed alternative system? All of this is just an interest rate applied to an outstanding balance. Many less people would own a house without such an option.
Yeah my parents are vehemently against borrowing money except for a mortgage. Otherwise, how will you save several hundred thousand dollars or more to buy a house in full? Most people can’t do that, even over decades.