My brother purchased a house in 2014 and had a rate of 4.5%, then 2 years later he refinanced and was able to get a rate of 2.5%. Why would a bank choose to reduce the amount of money they would get on his mortgage?
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If his bank doesn’t offer him a refinance, he might find a cheaper rate at a different bank, and they might lose out altogether.
Banks know very well which groups of borrowers are likely to shop around, and which are likely to be faithful customers, and their algorithms take that information into account when deciding on what interest rates to offer.
They don’t always have a choice. Most of the time, you can repay your mortgage early without penalty. So you could have gotten your first mortgage with Bank of America and then refinance through Wells Fargo. Wells Fargo would payoff your loan with BoA, and they can’t really stop you.
Since my first reply got deleted by a bot, I will try to explain in more detail.
Banks make their money on lending money to people at a higher interest rate than they give to people who deposit money in their institutions. Let’s say they loan someone money for a mortgage at 5% because that is the current rate. 3 years down the road interest rates continue to fall. The borrower wants a lower rate. He asks his bank to refinance at a lower rate than he is currently paying. His current bank has basically two options. 1) Lower his interest rate via a refi (where there are costs for the process paid to the current bank, or 2) lose this person as a customer for the next 15-30 years.
In some cases there is a fee/penalty paid to refinance early. Our last mortgage (2013) the penalty was approximately the same as 3 mortgage payments and is close to 100% profit for the bank.
There are several benefits for a bank when homeowners refinance their mortgage. The most common benefit is that the bank can charge fees for processing the loan, which can add to the bank’s profits. In addition, if the new mortgage has a lower interest rate than the old one, the bank may be able to earn more interest income on the loan.
Kind of wondering what conditions lead to people having prepayment penalties. I refinanced my last house and have paid a ton forward on my new place and no prepayment penalties.
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