Author Topic: Why would my bank offer me a refinance?  (Read 4439 times)

JustTrying

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Why would my bank offer me a refinance?
« on: March 12, 2016, 03:44:33 PM »
First-time home-owner, so I'm just a little thrown off here, and wondering if I'm missing something:

I just got a letter from my bank (and a voicemail) offering to refinance my mortgage with better rates. I did the math, and a refinance at the rate their offering would save me $50,000+ over the life of the loan (minus the fees for refinancing, which I'm not sure of at this point, but I would think are significantly less than $50,000). At this point I'm planning to pursue the re-fi, but I'm kind of confused about the offer. Why would my bank offer to save me money at their expense? What am I missing?

Thanks!

(Edited for clarity).

« Last Edit: March 12, 2016, 03:46:50 PM by JustTrying »

aperture

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Re: Why would my bank offer me a refinance?
« Reply #1 on: March 12, 2016, 03:49:35 PM »
minus the fees for refinancing
I am pretty sure it is just the fees.  The bank offering to refinance will not be offering the lowest fees or the lowest rate that you can get right now.  Suggest you shop around if you are planning to refinance.  -Ap

SwordGuy

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Re: Why would my bank offer me a refinance?
« Reply #2 on: March 12, 2016, 06:24:19 PM »
They will get the fees today and then sell the loan to someone else who will make less money later.

Proud Foot

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Re: Why would my bank offer me a refinance?
« Reply #3 on: March 14, 2016, 01:03:31 PM »
Like SwordGuy said, they will get the fees today and then sell it to someone else.

If they do not sell it, they are still able to make more from you with a lower rate than a higher rate, particularly if you refinance to a shorter term.  This will bring in more cash each month that they can turn around and re-loan at a possibly higher rate and new fees.  This is the same concept as why you can get a better interest rate from a 15 year than 30 year mortgage. I would think they are also looking forward and see interest rates rising so they want more cash to loan out at a higher rate than have it all tied up in a lower rate loan.

frugaliknowit

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Re: Why would my bank offer me a refinance?
« Reply #4 on: March 14, 2016, 02:12:42 PM »
If you have a conventional loan, it is most likely owned by Fannie Mae/Freddie Mac.  Your "bank" is just the "servicer".  They would potentially make money through fresh fees.

CindyBS

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Re: Why would my bank offer me a refinance?
« Reply #5 on: March 14, 2016, 02:36:04 PM »
They may also want you to extend the loan longer.  So if you are currently in a 15, they will probably try to sell you a 30.

slugline

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Re: Why would my bank offer me a refinance?
« Reply #6 on: March 14, 2016, 02:41:48 PM »
If your lender's cost of borrowing has dropped since you closed your original mortgage, they can "pass on the savings to you" and still make money with the fees associated with originating the new loan. You'll either come up with those costs at closing or that amount will be rolled into the new loan's balance.

https://www.zillow.com/mortgage-calculator/refinance-calculator/

The Zillow website has a pretty useful refinance calculator that will try to show you how you may stand to benefit and how long you'll have to wait before you get to "breakeven" with your new loan.

ooeei

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Re: Why would my bank offer me a refinance?
« Reply #7 on: March 14, 2016, 02:47:56 PM »
Imagine a situation where your fees take 10 years to re-coup through the rate savings, and you sell or refinance in 8 years.  You've now paid them more than you would have with the original loan. 

Look at how long the new rate takes to be net-positive considering fees.  If you think there's a decent chance of moving or re-financing in that amount of time, you should not do it.

caracarn

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Re: Why would my bank offer me a refinance?
« Reply #8 on: March 14, 2016, 02:48:20 PM »
Some of it is simple math.  If you're rate is high enough that they feel you would be likely to be tempted to re-fi anyway, they are trying to make it simple and keep the income stream theirs.  Yes, you save $50K and they lose $50K, but they still get the other $XK they would from you versus getting $0 if you moved to another bank to get a better rate. 

Just a simple example in case it makes more sense.  I have a loan and you will pay me $20 in interest.  Thinks have gotten better, and you can find a loan in the open market know that will only cost you $15 in interest and $2 in fees to do it.  If you bank offers you the same product, they still get your $17, instead of getting $0 and someone else getting your $17.

Another Reader

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Re: Why would my bank offer me a refinance?
« Reply #9 on: March 14, 2016, 04:08:40 PM »
If you have a conventional loan, it is most likely owned by Fannie Mae/Freddie Mac.  Your "bank" is just the "servicer".  They would potentially make money through fresh fees.

This.  Your lender is nothing but a middleman, the collector of payments for whoever owns the loan.  They get paid by Fannie or Freddie to collect the payments and manage the escrow account, if your loan requires one.  Part of their contract with Freddie or Fannie is they get to make you a new loan and collect the fees.  Some of the fees are up front, some are hidden in the interest rate you are offered.  The buyer of the loan pays the originating lender more for a higher interest rate, less for a lower interest rate.  As long as it meets underwriting standards, Fannie or Freddie will buy the loan from the originating lender.

gardeningandgreen

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Re: Why would my bank offer me a refinance?
« Reply #10 on: March 15, 2016, 08:30:42 AM »
All of the reasons here are valid. They may also be hoping that you have other debts that you want to consolidate into the loan. EG if you are paying 20% interest on a credit card with another bank. The bank offering you the refi will gladly take the revenue from the other bank. Yes it saves you money. Yes its a great thing for you but the bank also makes quite a bit of money off it. Banks are in it to make money but they honestly want people who make mostly intelligent decisions and don't have super crazy amounts of debt. I work as a banker and we like the customers who we can keep making loans to. Those are the people who usually have a pretty good handle on their lives. The ones who are drowning in debt we usually cant help.

JustTrying

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Re: Why would my bank offer me a refinance?
« Reply #11 on: March 15, 2016, 07:49:52 PM »
Thanks for all the replies! I think we'll shop around and consider a refi. We've only been homeowners for a year, but have been overpaying our mortgage, so it never really hit me that it would be possible to save money by refinancing, until the bank approached me.

Taran Wanderer

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Re: Why would my bank offer me a refinance?
« Reply #12 on: March 15, 2016, 10:51:28 PM »
If you plan to continue paying ahead, you may be better off not refinancing. Many on this site would try to talk you out of paying ahead, though!

Several years ago, out loan servicer offered a no-fee refinance. there seemed to be two possible reasons for this. First, interest rates had dropped significantly, and we were likely to go elsewhere and refinance. Second, they had acquired our loan from another bank who bought it from the original lender. I suspect they didn't have an adequate paper trail. Once they refinanced (at their expense), they had their paper trail established. It worked well for us because we started renting it shortly after, and the cash flow improved.