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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Banks make most of their money on the closing costs. Most of the time, they don’t end up holding the loan for very long and it gets bought by Frannie Mae or Freddie Mac. Any opportunity to get you to refinance, they want you to do it.
One bank is buying your loan from the other one. You should have already of aid down 1/6th of your original purchase price at a higher interest rate. You take out a loan from a different bank for the amount of money you owe if you pay for the loan in full.
You wouldn’t do this unless your new interest rates were a better deal.
The question is how much interest you have already paid, how much principle remains. When you refinance the interest starts all over again. So you need to consider how much you have paid, and how much you will pay. Refinancing early in the mortgage saves you more than later in the mortgage.
Mortgage refinancing is paying off your existing loan with the money from a new loan against the same property.
You’re right that the bank that holds your mortgage would not be very motivated to do it if it were the only bank around if refinancing ends up saving you money, but…
…other banks exist. Nothing is stopping you from going to another bank, and refinancing with them at whatever the current market interest rate is. The other bank would be happy to get some business even if it is less profit than your original loan; they weren’t going to get the money you’re paying your current bank anyway.
This motivates your original lender to also offer refinancing so that they can keep your business, even if it means they get a little less return.
They get to collect more interest as your current mortgage resets to the new 10/15/30 years.
Banks make their money originating loans (the fees you pay at closing) not collecting interest over the life of the loan. Unless they are a small portfolio lender most US home mortgages are sold off to Fannie Mae/Freddie Mac within a few months but the bank still collects payments for you and handles statements etc. They don’t care if you refinance lower because they already made their money. This is why you usually have to wait 6 months to refinance with the same bank (so they can ensure they made their money). Of course you can usually refinance with a different bank whenever you want.
I’m glad this thread popped up. I have a home I would like to purchase soon with plans to refinance once the interest rates finally settle down again. I’m calling a couple different banks, including my own. What I don’t get is if they HAVE to go with what the fed has as the interest rate standard. I’ve been pre-approved by both banks but I won’t know my interest rate until we move forward…
I work in the mortgage space (not in origination). Banks make money off mortgages in a few ways,
1) closing cost from the loan
2) keeping the loan on their balance sheet for interest income
2b) selling the loans to Fannie Mae , Freddie Mac or others
3) income from servicing the loan. As long as the loan have an outstanding balance, they make money every month
3b)sell the servicing right to someone else
(1) They will make money from closing cost.
(2)If they sold your loan, they don’t care if you refi your loan
If they didn’t, they wouldn’t want you to refi
(3) if they kept the serving right, they want to give you a new rate before someone else do. That way they can service you longer.
If they sold the serving right as a Mortgage Serving Right (MSR), they don’t care if you refi.
Refinancing a mortgage is like taking out a new loan with lower interest and paying your old one. You can do this at another bank if you can now achieve lower interest than before, or you can do it with the same bank.
Originally bought a home for 30 years at 3.25%. After 5 years the rates got good and refinanced for 2.25% for 15 years. I got a great deal which hopefully comes back at some point for future home buyers out there.
I’m paying almost the same mortgage for 10 less years.
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