Several years ago, my wife and I sold a home we had purchased forty-five months earlier. At closing, we were surprised to learn that we had to pay a $5,000 pre-payment penalty, because the loan had been paid off before four years elapsed.
We paid the penalty. We did ask Bank of America to forgive the penalty, given that we had just taken out a mortgage that would generate far more interest in a short period of time than the penalty we were assessed. Naturally, Bank of America declined our appeal.
Two short years later, we refinanced with Wells Fargo. To-date, Bank of America lost $100,000 of interest income, but gained the $5,000 pre-payment penalty. Try calculating the lifetime value of that decision!
Bank of America makes their 10-K statements available on their website, www.bankofamerica.com. These financial documents tell a fascinating tale of the money-making machine that is Bank of America.
In 2005, Bank of America received $34.8 billion dollars (yes, billion dollars) in interest and fees on loans and leases. For instance, when you make your $1,500 payment on your mortgage, the majority of that payment goes to interest, not to the principal on your home. Across all interest income categories, Bank of America generated $58.6 billion dollars of revenue. Amazingly, Bank of America only generated $27.9 billion dollars of interest expense, yielding $30.7 billion dollars of income.
Bank of America also earns $25.4 billion dollars of non-interest income, including $7.7 billion dollars in service charges, things like ATM fees or annual fees on your credit card. Another $5.8 billion is earned on credit card income.
So, in total, Bank of America earned $56.1 billion dollars of income. Non-interest expense was $28.7 billion dollars, yielding $24.5 billion dollars of pre-tax profit. $24.5 billion dollars of pre-tax profit.
Bank of America then paid $8.0 billion dollars of income tax expense. And we wonder why big business is so influential in governmental issues?! After subtracting taxes, Bank of America took home $16.5 billion dollars of after-tax profit.
It is amazing that we Americans don't raise more of a stink about how much money we give to banks, like Bank of America. We grumble over paying $3.50 for a gallon of gas, and feel frustrated when our annual gasoline bill is $3,000. We feel like the oil industry is gouging us.
Yet, homeowners deal with a situation that is much more severe on their checkbook. A family with a $200,000 mortgage at a 6% interest rate pays as much as $8,700 a year in interest expense. If this family earns $50,000 per year, as much as a quarter of take-home pay goes to the bank servicing the mortgage. Add to that home equity loan interest, credit card interest, car loan interest, service charges and annual fees, ATM charges, and any other expense, and it becomes obvious that your local bank has control over your checkbook.