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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Some Redditors appear to be assuming that a refinancing is inherently better for the lender over the long term. That’s not necessarily the case.
A lender would always prefer to have you paying an above-market interest rate on your loan, but that’s not entirely within their control. If market interest rates drop, you have the ability to seek replacement funding at lower, current rates (i.e, “refinance”).
Since a borrower is not limited to refinancing with their current lender, the borrower can shop around for the best rate they can find. If rates have fallen enough to offset the cost of refinancing, the current lender has two options: offer a current market interest rate to keep a customer’s business, or watch that customer refinance with a different lender at a better rate.
Because you pay more interest early in the loan. Look at an amortization schedule and you’ll get the idea.
That was my favorite part of being a branch manager. I could take people from a higher interest loan, bring it over to my bank at a cheaper interest rate, and save them money while our branch made money.
The best I ever did for someone is take 13 credit cards, not exaggerating and consolidate them into one home loan. Lowered his payments to 200 bucks a month, much cheaper interest rate, and a light at the end of a tunnel. All cards were closed as well. He made payments on all of them so his credit score was still high.
Think some of the answers are missing a giant piece of the equation. When you refinance people often extend the years left on the loan which makes the interest being paid at the moment higher.
To add on to this question, I wonder why banks haven’t lobbied hard to make it illegal to refinance. It seems like it would be a no brainer to capture people in 30 year contracts that are impossible to escape from.
Former banker here,
Banks aren’t about making money. They’re about managing risk. (yes, they make ungodly amounts of money, but they’d rather mitigate risk on the money they have than make small percentages higher on riskier liabilities).
A lot of work I did was to refinance mortgages to bring in debt that’s riskier. In Canada, in the last 20 years, there’s nothing safer than property values. I’d rather take in your boat loan, your credit card debts ( you wouldn’t believe how much credit card debt is out there ) your kid’s student loans, and put it all on your house.
This is only one example, but there are tonnes of other reasons why they’re not necessarily losing money to refinance your debt for you.
Sometimes, it is another bank offering the new mortgage. In the case that it is the same bank refinancing lower, they get a nice upfront chunk of money to do it, which they like. Mortgages always carry the risk of not getting paid back, or getting paid back in full, so they miss out on the interest, but a refinance is immediate money for them, and likely lowers their risk of the homeone defaulting, so they might make less, but they are lowering their risk.
None of these replies address why a bank would refinance the same mortgage to a lower rate. Fannie, Freddie, fha, and Va are 4 main entities that buy mortgages from lenders. Lenders originate a loan, and sell the “contract” to one of the 4 above (there are others but this is eli5). When they do buy the contract, assuming it was underwritten to their guidelines, they pay a rate premium (commission) up front in order to collect the interest later. Lenders refinance people regardless of the rate or relationship with the previous originating lender, because they collect the premium paid up front from fha, Va, Fannie, Freddie.
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.
Mortgages are paid on a reverse amortization schedule, meaning the bulk of the interest is paid in the first 10 years of a 30 year loan. If you refinance 5-10 years into your mortgage for a new 30 year term that interest heavy payment cycle starts over again.
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