If It’s Sounds Too Good to Be True …
I received calls from two past clients recently, telling me that they received an overnight UPS envelope from their loan servicer – Chase – stating that they were being offered an “exclusive opportunity to refinance to a low, fixed rate mortgage at no cost.”
All they had to do was call the number on the letter within one week.
Fortunately, these two clients called me. Unfortunately for many others, they probably took the deal being offered and refinanced their homes with Chase at a rate above the market rate.
Sure, the rate was better than the rate they already had, but it was at least .25 percent higher than the rate they could have obtained had they called me or almost any other lender.
There are a few lessons to be learned here:
- Don’t assume that your bank or loan servicer is offering you anything that is in your best interest,
- Don’t assume that your lender can take any shortcuts or make it “easier”
- Every lender can offer a “no-cost” refinance.
How Banks Profit from Mortgages
Banks, particularly the four big banks, are making huge profits on their mortgage business right now by charging a higher rate of interest than necessary. And, the reason that banks charge more is ”because they can” according not only to me but also toThomas Lawler, a former chief economist for Fannie Mae, who was quoted in a recent New York Times article.
The big banks make money on mortgages in two ways:
- As middlemen, banks make money by taking your mortgage and bundling it with many others into bonds that are then sold primarily to the two government-owned agencies known as Fannie Mae and Freddie Mac. The higher the mortgage rate paid by the homeowner and the lower the rate paid on the bonds that they sell, the bigger the profit for the bank.
- Banks collect a small portion of the interest rate on the loans that they service. The rest of the payment made by the homeowner is passed on to the investors that buy the bonds backed by your mortgage. Your bank does not typically own your loan; they merely service it by collecting the payments and passing the rest to the investor.
In the case of a homeowner that took Chase’s offer to refinance at a rate .25 percent above the going market rate, the extra profit to the bank on a $400,000 loan is about 1 point or $4,000. The extra cost to the homeowner for paying a .25 percent higher rate is $57.20 per month or $686.37 per year – or more than $20,000 over 30 years!
As for “no-cost” mortgages; any lender can do this. The borrower pays a higher rate of interest so that the lender can get paid more when the loan is sold. That extra amount is used to pay the borrowers’ closing costs.
In the case of the two borrowers mentioned here, this was already factored in. In other words, Chase’s rate for the “no-cost” refinance was higher by about .25 percent than other lenders’ rate for a no-cost refinance. Unless the homeowner is selling the house in five years or less, it is usually advisable to take a lower interest rate and pay the closing costs.
