How much of my home loan is coming from a bank, how much it goes back?
"Judging from your comments, you seem to be confused about the way banking works.  Banks can only lend out money that they actually have: whether from deposits or investors or loans taken from other banks/government entities.  The rules on how this works varies from country to country, but the principle is always the same.  There is no magic money. Let's imagine a closed system.  There's only one town, and that town only has one bank.  There are 100 people total in town, and each has $10,000.  Everyone deposits all of their money in the bank. The bank now has $1,000,000 in total deposits.  You take a loan for $100,000 and buy a house.  The bank now has $900,000.  You make your payments of $965 per month: $833 of interest and $132 toward principal.  In this ideal world, the bank has no costs associated with doing business.  After one month, the bank has $1,000,000 in deposits, $900,965 in cash on hand, $99,868 in loans, and $833 in profit (from interest). Now here's the confusing part.  You bought a house from someone.  That person also lives in town.  He takes the $100,000 you gave him and... deposits it in the bank.  The bank now has $1,100,000 in deposits, $1,000,965 in cash, $99,868 in loans, and $833 in profit. Assume 10 more people buy houses at $100,000 each, taking loans for that whole amount (for the same terms you did).  Assume those sellers then deposit the money back in the bank.  The bank now has $2,100,000 in deposits, $1,000,965 in cash, $1,099,868 in loans, and $833 in profit.  The bank is taking in $10,615 per month ($965 x 11) in loan payments, making profit of $9,163 ($833 x 11) per month from interest. This process of loans and deposits and payments can go on forever without any outside influence.  This is the primary way money is created.  It's like printing money without the paper. Of course, we're not in a closed system.  Banks are limited in endlessly creating money, primarily by two things: Reserve Requirements are set by government agencies.  They might say banks can lend until their cash on hand (or liquid equivalent) is, at minimum, 35% of total deposits.  So a bank with $1,000,000 in deposits would have to keep $350,000 in cash at any given time. Capital Requirements work largely the same way.  It's more the bank saying, ""What happens if a bunch of people want their deposits back?""  They plan a reasonable amount of cash to have on hand for that scenario." When you get a loan (car, home, student) the lending company (bank) give the (auto dealer, previous home owner, school) money. You as the borrow promise to pay this money back with interest.  So in your case the 100,000 you borrow requires a payment for principal and interest of ~965 per month. After 240 payments you will have paid the bank ~231,605.  So who got the ~131,000 in interest. The bank did. It was used to pay interest to the people who made deposits into the bank. It was also used to pay the expenses of the bank: salaries, retirement, rent, electricity, computers, etc. If the bank is a company with investors they may have to pay dividends to them to.  Of course not all loans are successfully paid back, so some of the payment goes to cover the loans that are in default. In many cases loans are also refinanced, or the house is sold long before the 20-30 year term is up. In these cases the amount of interest received for that loan is much less than anticipated, but the good news is that it can be loaned out again. "Ditto mhoran_psprep.  I'm not quite sure what you're asking. Where does the money come from? When someone starts a bank, they normally get together a bunch of investors -- perhaps people they know personally, perhaps they sell stock -- to raise initial capital. But most of the money in the bank comes from depositors. Fundamentally, what a bank does is take money from depositors and loan it to borrowers. (Banks also borrow money from other banks and from the government.) They charge the borrowers interest on the loan, and they pay depositors interest on their deposits. The difference between those two interest rates is where the bank gets their profit. Where does the money go when you pay it back? As mhoran_psprep said, some of it goes to pay interest to the depositors; some of it goes to pay the bank's expenses like employee salaries, cost of the building, etc; and some of it goes as profit to the owners or stockholders of the bank. If you're thinking, ""Wow, I'm paying back a whole lot more than I borrowed"", well, yes. But remember you're borrowing that money for 20 or 30 years. The bank isn't making very much money on the loan each year that you have it -- these days something like 4 or 5% in the U.S., I don't know what the going rates are in other countries."
"Based on your information...  The house is $130,000 all in (this might not be the case)  Your payment term is 30 years.  Your interest rate is about 7.35%.  Your payments are about $895.66  Your total payments will total $322,438.95  That's not a very good interest rate for a mortgage, but this might be due to poor credit or limited credit history, too low income, or too much home value being financed (or a combination of the above and other factors).  Northern Alabama may not specifically be higher interest rate: it might, honestly, just be you.  The reason that you're paying $320,000 is that you're taking $130,000 from a bank and promising to pay it back with interest. Keep in mind, that's over *thirty years.* That's a LONG time. And the bank needs to earn enough interest to combat inflation (roughly 2% annually, generally). During that time, the bank *can't* invest that money elsewhere, return it to depositors, etc.  A good rule to keep in mind is the ""rule of 72."" It's a simple trick to determine, based on an interest rate, how quickly the value of something will double (in this case, the value of your loan payments). If your interest rate was exactly 7.2%, this method would calculate 10 years until doubling.   In your case, 72 / 7.35 = 9.7959 years.   Now, you're paying off your loan simultaneously, which lowers your interest over time, so your payments total 2.48x of loan value at origination. That still sucks, but remember, it's over a loooooooooooooooooooooooooooooooooong time." "With (1), it's rather confusing as to where ""interest"" refers to what you're paying and where it refers to what you're being paid, and it's confusing what you expect the numbers to work out to be. If you have to pay normal interest on top of sharing the interest you receive, then you're losing money. If the lending bank is receiving less interest than the going market rate, then they're losing money. If the bank you've deposited the money with is paying more than the going market rate, they're losing money. I don't see how you imagine a scenario where someone isn't losing money. For (2) and (3), you're buying stocks on margin, which certainly is something that happens, but you'll have to get an account that is specifically for margin trading. It's a specific type of credit with specific rules, and you if you want to engage in this sort of trading, you should go through established channels rather than trying to convert a regular loan into margin trading. If you get a personal loan that isn't specifically for margin trading, and buy stocks with the money, and the stocks tank, you can be in serious trouble. (If you do it through margin trading, it's still very risky, but not nearly as risky as trying to game the system. In some cases, doing this makes you not only civilly but criminally liable.) The lending bank absolutely can lose if your stocks tank, since then there will be nothing backing up the loan." "A bank may not like loaning money to you for this. That is one snag. You listed 500,000-600,000$ for a monster of a house (3000 sqft is over three times the average size of homes a hundred years ago). Add in the price of the land at 60K (600K divided ten ways). Where I live, there is a 15% VAT tax on new homes. I can't find out if California imposes a VAT tax on new homes. Anyway, returning back to the topic, because of the risk of loaning you 660K for a piece of land and construction, the bank may only let you borrow half or less of the final expected cost (not value). Another huge snag is that you say in a comment to quid ""I came up with this conclusion after talking to someone who had his property built in early 2000s in bay area for that average price"". Let's apply 3% inflation over 15 years to that number of 200$/sqft. That brings the range for construction costs to 780K-930K. Even at 2% inflation 670K-810K. Edit: OP later expanded the question making it an inquiry on why people don't collaborate to buy a plot of land and build their homes. ""Back in the day"" this wasn't all that atypical! For example, my pastor's parents did just this when he was a young lad. Apart from the individual issues mentioned above, there are sociological challenges that arrive. Examples: These are the easy questions." "So with any debt, be it a loan or a bond or anything else, you have two parts, the principal and the interest. The interest payment is calculated by applying the interest % to the principal. Most bonds are ""bullet bonds"" which means that the principle remains completely outstanding for the life of the bond and thus your interest payments are constant throughout the life of the bond (usually paid semi-annually). Typically part of the purpose of these is to be indefinitely refinanced, so you never really pay the principal back, though it is theoretically due at expiration.  What you are thinking of when you say a loan from a bank is an amortizing loan. With these you pay an increasing amount of the principal each period calculated such that your payments are all exactly the same (including the final payment).  Bonds, just like bank loans, can be bullet, partially amortizing (you pay some of the principle but still have a smaller lump sum at the end) and fully amortizing. One really common bullet structure is ""5 non-call 3,"" which means you aren't allowed to pay the principle down for the first three years even if you want to! This is to protect investors who spend time and resources investing in you!" Disclosure: I work for Wells Fargo Home Mortgage.   This is normal. The bank is giving you a discount on the interest rate in exchange for the automatic payments. Unfortunately, the bank has the power here; they have your mortgage, and they have the right to call your loan in full at any time, and foreclose on your house if you don't pony up. It's okay to not like being pushed around, but you need to know when to hold'em and when to fold'em, and your facing a royal flush with pair of 4s. A security is a class of financial instrument you can trade on the market.  A share of stock is a kind of security, for example, as is a bond. In the case of your mortgage, what happens: You take out a loan for $180k.  The loan has two components. a.  The payment stream (meaning the principal and the interest) from the loan b.  The servicing of the loan, meaning the company who is responsible for accepting payments, giving the resulting income to whomever owns it. Many originating banks, such as my initial lender, do neither of these things - they sell the payment stream to a large bank or consortium (often Fannie Mae) and they also sell the servicing of the loan to another company. The payment stream is the primary value here (the servicing is worth essentially a tip off the top).  The originating bank lends $180k of their own money.  Then they have something that is worth some amount - say $450k total value, $15k per year for 30 years - and they sell it for however much they can get for it.  The actual value of $15k/year for 30 years is somewhere in between - less than $450k more than $180k - since there is risk involved, and the present value is far less.  The originating bank has the benefit of selling that they can then originate more mortgages (and make money off the fees) plus they can reduce their risk exposure. Then a security is created by the bigger bank, where they take a bunch of mortgages of different risk levels and group them together to make something with a very predictable risk quotient.  Very similar to insurance, really, except the other way around.  One mortage will either default or not at some % chance, but it's a one off thing - any good statistician will tell you that you don't do statistics on n=1.  One hundred mortgages, each with some risk level, will very consistently return a particular amount, within a certain error, and thus you have something that people are willing to pay money on the market for. If the customer pays 20% of the payment in advance, then he is he owns 20% of the house and the bank owns 80%. Now they say he pays the rest of the amount and also the rent of the house until he becomes the sole owner of the house. You are saving around 2.41% over the Car Loan for a duration of 35 months. Check out if the fees for redrawing on home loan and fees for closing the matches the money saved. Edit: If you are making your current car payments as additional monthy payments to your mortgage then you are in effect paying less interest than current car loan. For a short term loan, the interest is closer to straight line, e.g. A $10K loan at 10% for 3 years will have approximately $1500 in interest. (The exact number is $1616, not too far off). You will save 2.41% on the rate, so you'll the extra payment you'll send to the mortgage will save you about 10000*35*(2.41/12)/2 or about $350 over the 3 year period. Some countries, like the United States, allow a mortgage interest tax deduction.  This means the interest you pay on a mortgage, which is typically much more than half of the monthly payment at the beginning of a 25 year mortgage, is tax deductible, so you might get 33% or more of the interest back, and that effectively makes the interest rate significantly lower.  Therefore you are borrowing the money really cheap.  That makes MrChrister's answer even more appropriate. A lender will look at three things when giving a loan: Income. Do you make enough money each month to afford the payments. They will subtract from your income any other loans, credit card debt, student loan debt, mortgage. They will also figure in your housing costs. Your Collateral. For a mortgage the collateral is the house, for a car loan it is the car. They will only give you a loan to a specific percentage of the value of the collateral. Your money in the bank isn't collateral, but it can serve as a down payment on the loan.  Your Credit score. This is a measure of how well you handle credit. The longer the history the better. Using credit wisely is better than not using the credit you have.  If you don't have a credit card, get one. Start with your current bank. You have a history with them. If they won't help you join a credit union. Another source of car loans is the auto dealer. Though their rates can be high. Make sure that the purchase price doesn't require a monthly payment too high for your income. Good rules of thumb for monthly payments are 25% for housing and 10% for all other loans combined. Even a person with perfect credit can't get a loan for more than the bank thinks they can afford. Note: Don't drain all your savings, you will need it to pay for the unexpected expenses in life. You might think you have enough cash to pay off the student loan or to make a big down payment, but you don't want to stretch yourself too thin. "BEFORE you invest in a house, make sure you account for all the returns, risks and costs, and compare them to returns, risks and costs of other investments. If you invest 20% of a house's value in another investment, you would also expect a return. You also probably will not have the cost interest for the balance (80% of ???). I have heard people say ""If I have a rental property, I'm just throwing away money - I'll have nothing at the end"" - if you get an interest-only loan, the same will apply, if you pay off your mortgage, you're paying a lot more - you could save/invest the extra, and then you WILL have something at the end (+interest). If you want to compare renting and owning, count the interest against the rental incoming against lost revenue (for however much actual money you've invested so far) + interest.  I've done the sums here (renting vs. owning, which IS slightly different - e.g. my house will never be empty, I pay extra if I want a different house/location). Not counting for the up-front costs (real estate, mortgage establishment etc), and not accounting for house price fluctuations, I get about the same ""return"" on buying as investing at the bank. Houses do, of course, fluctuate, both up and down (risk!), usually up in the long term. On the other hand, many people do lose out big time - some friends of mine invested when the market was high (everyone was investing in houses), they paid off as much as they could, then the price dropped, and they panicked and sold for even less than they bought for. The same applies if, in your example, house prices drop too much, so you owe more than the house is worth - the bank may force you to sell (or offer your own house as collateral). Don't forget about the hidden costs - lawn mowing and snow shoveling were mentioned, insurance, maintenance, etc - and risks like fluctuating rental prices, bad tenants, tenants moving on (loss of incoming, cleaning expenses, tidying up the place etc)...." Banks and lenders have become a bit more conservative since the housing crisis. 80% is a typical limit. The reason is to minimize the lender's risk if declining property values would put the borrower upside-down on the loan. http://www.bankrate.com/finance/home-equity/how-much-equity-can-you-cash-out-of-home.aspx Forget about terms.  Think about loans in terms of months.  To simplify things, let's consider a $1000 loan with .3% interest per month.   This looks like a ten month term, but it's equally reasonable to think about it on a month-to-month basis.  In the first month, you borrowed $1000 and accrued $3 interest.  With the $102 payment, that leaves $901 which you borrow for another month.  So on and so forth.   The payoff after five payments would by $503.54 ($502.03 principal plus $1.51 interest).  You'd save $2.99 in interest after paying $13.54.  The reason why most of the interest was already paid is that you already did most of the borrowing.  You borrowed $502.03 for six months and about $100 each for five, four, three, two, and one month.  So you borrowed about $4500 months (you borrowed $1000 for the first month, $901 for the second month, etc.).  The total for a ten month $1000 loan is about $5500 months of borrowing.  So you've done 9/11 of the borrowing.  It's unsurprising that you've paid about 9/11 of the interest.   If you did this as a six month loan instead, then the payments look different.  Say  You borrow $1000 for one month.  Then 834 for one month.  So on and so forth.  Adding that together, you get about $168.50 * 21 or $3538.50 months borrowed.  Since you only borrow about 7/9 as much, you should pay 7/9 the interest.  And if we adding things up, we get $10.54 in interest, about 7/9 of $13.54.   That's how I would expect your mortgage to work in the United States (and I'd expect it to be similar elsewhere).  Mortgages are pretty straight-jacketed by federal and state regulations.   I too once had a car loan that claimed that early payment didn't matter.  But to get rid of the loan, I made extra payments.  And they ended up crediting me with an early release.  In fact, they rebated part of my last payment.  I saved several hundred dollars through the early release.  Perhaps your loan did not work the same way.  Perhaps it did.  But in any case, mortgages don't generally work like you describe. From what I have heard on Clark Howard if you pay your balance off before the statement's closing date it will help your utilization score.  He has had callers confirm this but I don't have first hand knowledge for this to be true.   Also this will take two months to make the difference.  So it will be boarder line if you will get the benefit in time.   Sign up for credit karma if you like.  You can get suggestions on how to help your score.