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I've never understood mortgage refinancing in the US. Isn't the lender taking a loss when you refinance, since their 20-year asset will now pay less in interest

by marvin 6y ago

I've never understood mortgage refinancing in the US. Isn't the lender taking a loss when you refinance, since their 20-year asset will now pay less in interest than before? How does the lender make up for this loss, if the debtor isn't paying the difference every time they refinance to a lower interest rate?

adventured 6y ago
The lender has no practical alternative in most cases other than to reject business outright. The reason they go along with it mostly willingly, is the borrower can typically go somewhere else for the loan. The current lender would just as soon keep you as a customer at 2% (vs the old 4%) than see you go somewhere else. They don't make up for the loss, they accept the lower rate of return vs losing the customer entirely.
- marvin 6y ago
  Fascinating, thanks for the info. In Norway, fixed-rate mortgage agreements are always made with a clause mandating settlement of the interest difference, in the case of refinancing or early repayment. The customer therefore has no leverage over the lender by threatening to take the loan elsewhere. They'd have to pay all of the remaining interest if they wanted to settle the loan, or at best settle the interest difference if moving the loan to a lender with a different interest rate. Assuming both banks agreed to the exchange. Of course, if interest rates increase, such settlement could also favor the borrower. But that hasn't been the case in a long time. Most mortgages here are floating-rate.
imtringued 6y ago
If you have a $1 million mortgage with 5% interest you are paying $50k interest per year. Meaning you are paying most of your interest at the beginning of the loan. If you are down to $750k after 10 years and refinance to 2% you have already paid around $350k in interest . The bank has already gotten the biggest chunk of the profits but takes a "loss" on the remaining portion.

by marvin 6y ago

adventured 6y ago

The lender has no practical alternative in most cases other than to reject business outright. The reason they go along with it mostly willingly, is the borrower can typically go somewhere else for the loan. The current lender would just as soon keep you as a customer at 2% (vs the old 4%) than see you go somewhere else. They don't make up for the loss, they accept the lower rate of return vs losing the customer entirely.

marvin 6y ago
Fascinating, thanks for the info. In Norway, fixed-rate mortgage agreements are always made with a clause mandating settlement of the interest difference, in the case of refinancing or early repayment. The customer therefore has no leverage over the lender by threatening to take the loan elsewhere. They'd have to pay all of the remaining interest if they wanted to settle the loan, or at best settle the interest difference if moving the loan to a lender with a different interest rate. Assuming both banks agreed to the exchange. Of course, if interest rates increase, such settlement could also favor the borrower. But that hasn't been the case in a long time. Most mortgages here are floating-rate.

imtringued 6y ago

If you have a $1 million mortgage with 5% interest you are paying $50k interest per year. Meaning you are paying most of your interest at the beginning of the loan. If you are down to $750k after 10 years and refinance to 2% you have already paid around $350k in interest . The bank has already gotten the biggest chunk of the profits but takes a "loss" on the remaining portion.