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by aabaker99 1762 days ago
If you have a fixed rate mortgage, the bank bears an interest rate risk. If the interest rate goes up, the bank could be getting more money in interest, but they aren't.

If you have an adjustable-rate mortgage, you bear the interest rate risk.
2 comments
crummybowley 1762 days ago
No, the bank has at risk the capital loaned, which they payed out. A risk is not a "loss" in a hypothetical amount of money that maybe could be had in the future given market conditions which are not predictable.
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aabaker99 1762 days ago
> A risk is not a "loss" in a hypothetical amount of money that maybe could be had in the future given market conditions which are not predictable.

This is incorrect. It is very common for investors (yes, including commercial banks) to frame risk in the way I described. This link to investopedia will expound upon my admittedly short description of interest rate risk [1]. Another obvious risk in this context is prepayment risk [2]. Note that both of these risk models are not about whether or not the bank is losing the money used to pay for the home, but are about factors that could affect the return on investment. You can find even more examples of risk models exactly like this on investopedia.

[1] https://www.investopedia.com/terms/i/interestraterisk.asp [2] https://www.investopedia.com/terms/p/prepaymentrisk.asp

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BizarroLand 1760 days ago
Is it just me or is a prepayment risk effectively moot for large loan investment companies like banks?

After all, even though their calculations were counting on the profits of that money, having it back now means they can loan it out again, and possibly will receive a lager return if interest rates have risen.

For instance, my mortgage is at 2.49%. Right now interest rates are at 3.04%, so if I paid my mortgage off today the bank should be able to find a borrower who would pay over 20% more for the same money, right?

I get that this could go in the opposite direction, though, so I know it's not a perfect answer.

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da_big_ghey 1762 days ago
and for its trouble and for its more risk bank is getting a higher rate than variable. bank run numbers so it receive acceptable level of risk.
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