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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Most of the time, a bank isn’t making money on the loan itself. The value of the loan is usually packaged with a bunch of other mortgages, and that package usually gets sold off to a bigger lender, like Fannie Mae or Freddie Mac.
But, when you buy a home and finance it, or when you refinance an existing mortgage, there are loan origination fees that get charged. This is an administrative fee of about .5-1% of the loan amount that the bank charges to get everything started… and usually it’s rolled into the cost of the loan when refinancing occurs. So, the balance of your loan will go up a little bit, but if you’re refinancing to get a lower rate, your payments end up being lower because of that lower interest rate.
There can also be fees for things like home appraisals, where someone actually visits the home and places a value on it, to make sure the loan is a good risk to the bank.
So, every time you refinance a loan, new fees often get tacked on. This is where the bank makes its money on the front end.
Then, there’s the back end. As I mentioned above, most mortgage usually get “owned” by large guarantors, usually Fannie Mae/Freddie Mac. But, that’s almost never who you write your check to. Fannie and Freddie employ mortgage companies and banks to “service” the loan, doing all the dirty work of collecting payments, managing your escrow, generating invoices, and answering the phone when you call with questions. For this effort, the loan servicer will get a fee, usually a small cut of the payments you’re making.
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