Keep getting free refi offers, which are starting to make me wonder...

[mustachianteacher]

The institution that holds our mortgage has sent us three offers in the last three months to refinance our mortgage. Normally, I don't even open or seriously consider solicitations like that, but because they came from them, I had a look to make sure there wasn't anything I needed to know about our account.

What struck me was that they were all offering a completely free refi at a lower rate (we are at 4.875%; they were offering rates in the 3.5-3.8% range) for the balance of the loan, or a shorter term. We could even keep the exact same time table we're on, if we wanted to, and just drop down to a lower rate.

After giving it some thought and returning to my general distrust of solicitations, I decided not to pursue it and just keep making extra payments as we are. I can't help but wonder, though, how the bank makes money on something like this? Assuming they're not just super nice and all, what's in a refi like this for them? I find it hard to believe they'd make offers like this that wouldn't produce some kind of new revenue for them.

[Rezdent]

Curious.
I would also be suspicious as they are certainly not in business to lose money.  Either there's hidden fees or the terms are different somehow.  Or possibly the original loan is so bad that they are bleeding customers - but that should be unlikely to cause them to spam you.

[Tyler]

Just because the letter said the refi could be free doesn't mean you'd qualify for that once you call. Even with no points, I'm betting some fees get squeezed on.

Or perhaps they simply know you're a prime candidate for another bank to poach and want to keep your business.

The way banks sell mortgages in the background is also more complicated than you realize, and perhaps there's room for profit there as well.

[Catbert]

You're right there is no free lunch.  Some "free re-fi's" real mean no money out of pocket and they just roll the fees into the loan balance.  On other "free" re-fi's  they are making their money on an interest rate spread...some cost loans tend to have a slightly higher than those with fees.  Even a 1/8% can make up for no fees.

Also remember that the bank which services your loan may not actually own it.  They can make more money churning loans than just servicing the ones they already have.

 

[Spondulix]

That's over 1% - why aren't you considering refinancing?

Even if you don't trust your bank, why not look into a refi with another bank? At 1% rate reduction you're probably going to make up any costs rather quickly.