Why would a bank offer refinancing at a lower interest? Is any money saved at all, or is it just paid on a different timeline?
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Mortgage refinancing is renegotiating your mortgage, either with lower interest rates, or extending the amortization period (e.g. plan to pay off in 30 years instead of 25).
Banks offer it because they make more in the long term. People do it because it reduces their monthly payment now, even if it means they pay more over the long term.
There’s typically also a penalty for renegotiating your mortgage, but that ends up rolled into the mortgage for most people.
*Edit*: also, it’s generally better for a bank to have mortgages that the customers can actually pay.
You take out another loan to pay off the loan that you originally had.
That other loan will have a time period over which it needs to be paid. If someone is refinancing, almost always they’ll be given a LONG loan to pay back over a long time, but the payments will be less.
They pay less each month (smaller mortgage payment), but they’ll be paying it for longer than the original mortgage would have been in place. So though you might have originally paid it off when you’re 55, now you’re not finished with until you’re 65 or whatever.
You only refinance if you’re struggling to afford it or need the money for something else. The bank will “help” you by letting you take out a loan that will give you more money NOW, and maybe at a lower price, but will cost you far more in the long-run.
Most mortgages can be paid off at any time — doesn’t matter whether it’s because they need to / want to move, or because they’re refinancing.
When one refinances, it’s almost always a new bank issuing a new mortgage and paying off the existing mortgage. So your current mortgage is with BigBank at 4.5% but NewBank will offer you a mortgage at 3.5%. So you get a new mortgage with NewBank who then pays off your loan balance at BigBank. And all future mortgage payments go to NewBank.
Refinancing doesn’t have to be with the same bank that has your mortgage currently. Just like refinancing an auto-loan, you go to like a credit union, they pay off your loan and now you pay them instead. The same bank you have it with will offer it to, because then you could go to someone else and they’d lose out on the interest.
Also, you usually pay a fee, so if the newer rate is just barely lower it may actually cost more money to refinance.
Just because refinancing saves the home buyer money doesn’t mean it loses any banks any money.
The bank that issues the new mortgage obviously makes a profit or else they wouldn’t be offering that rate.
The bank that held the original mortgage is a little more complicated. They get paid back ahead of schedule. You’d think they might be angry about that because they lose out on interest payments (and in rare cases they are, but government rules have generally shut down any repayment restrictions/penalties they might try to impose), but they generally prefer to have money now than promises of money in the future. They can just turn around and lend that money to someone else.
So how can everyone win? Interest rates fell. This reflects economic conditions where it’s easy to borrow money (often because the central bank is offering low rates to banks). Economics is often NOT a zero-sum game. If something becomes easier to produce (which is kind of abstract in the case of a loan, but just roll with it), there’s usually a way for everyone to win.
Often, when refinancing, you do it at a different bank, so the new bank is stealing business from the old one.
If you refinance at the same bank, they are preventing losing you as a customer. Additionally, they will get the closing costs, which is an upfront boost for them.
I bought my house in 2019 at a 4.5% interest rate. Rates dropped in 2020 and I got ads from other companies offering lower rates. I contacted my bank and asked them if they would consider refinancing to match the lowest offer of 3.25%. They could either say yes and take in less interest income over the life of the loan, or say no and take in zero additional interest income since I could get a better rate from a different company.
They refinanced my mortgage.
Banks don’t make money on rate generally. Almost all loans are sold to agencies like Fannie mae/Ginnie mae who sell them to investors. They do this to get the principal back. Then they are paid a fee to service the loan. This fee income is longer term revenue and if they can keep that from running off from refinancing elsewhere they keep the cash flow longer
The actual origination of the loan typically costs the bank money. It’s a business they hate but they have to do to provide expected services. Cheaper to buy the servicing from other local lenders and consolidate billions in loans each giving a small monthly cash flow.
Refinancing is basically just getting a loan to pay of your existing loan.
You could do it without your bank having any real recourse by going to another bank, so a bank has an incentive to let you do it in house to keep your business.
TLDR: banks offer refinancing even if they’ll make less money because they’d rather you get a better rate and keep paying interest with them than leave for a different lender.
One reason for refinancing is changed borrower circumstances. When I bought my first condo 20 years ago I had a spotty credit history, and didn’t qualify for the best rate. My lender helped me to select a variable rate mortgage with a better initial rate with plans to refinance to a fixed rate before 3 years once I had a clean payment history. In 2 years I qualified for a 15 year fixed rate that was slightly lower than my original 30 year variable rate, and was able to lock in that rate for the life of my loan.
Variable rate mortgages are commonly lower rates than fixed rates, because you as the borrower are assuming some of the risk that rates will rise in the future. It can be worth the trade off if you don’t plan on keeping the property long term or you think you’ll qualify for better financing terms in the future
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