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In the US on 30 year fixed rates I understand you can refinance down without penalty. Can someone confirm?

by voisin 3y ago

ethbr1 3y ago
Correct. You're essentially paying to originate a new mortgage (with the same originator as your previous or anyone else). Proceeds pay off previous mortgage, and no one can really tell you no. I'm not sure if any US mortgage can have prepayment penalties and be compliant? (for resale of the mortgage debt) Worst I've seen is "If you pay fully before X date, we'll charge you the closing fees we comp'd you originally."
- nemo44x 3y ago
  No mortgages don’t have early payoff penalties. The bank doesn’t really care. They’ve probably sold your mortgage off to be packaged in a bond anyways. They’re mainly in the business of selling loans. There’s a big margin on that. They’re more than happy to payoff your old one and write a new one and collect those fees.
  - ethbr1 3y ago
    Is there anything that prevents it though? If not, I assume someone would have written a 3/1 ARM with predatory early repayment provisions, so I'm guessing there's probably a conformant mortgage guideline (e.g. from *Mac) that prevents clauses like that.
curiousgal 3y ago
Refinancing only works when the value of your house increased.
- gorjusborg 3y ago
  There's nothing about refinancing that requires your house value to increase. The concept is that you are taking out a loan to pay off an earlier loan. If you borrowed at 8% and rates dropped to 2%, you could refinance even if your house price dropped, and it would still make sense, as you borrowed what you borrowed, and still owe it. Now, if you are trying to refinance and take some money out from equity, sure, that relies on having greater equity than the loan value.
  - chii 3y ago
    > If you borrowed at 8% so whoever lent you at 8% would take a loss if you could just abandon that rate and went with someone else's 2% rate. Therefore, it can't be this simple - somebody must be eating a loss. I suspect that 'somebody' is Freddie Mac and Fannie Mae , which is a quasi-gov't corporation and therefore, they might be able to take the loss without worrying about profitability.
    - Spivak 3y ago
      > so whoever lent you at 8% would take a loss Why would they? If I lend you $100 at 8% interest and for simplicity let's say it's an interest only loan so you only pay the interest I get $8/yr for my trouble. Then you refinance with someone else at 2% and I get my $100 back. All good, now it's available to me to loan back out. The only thing I've "lost" is future profits but you also could have just paid off the loan entirely in cash to the same effect.
      - chii 3y ago
        > The only thing I've "lost" is future profits but you also could have just paid off the loan entirely in cash to the same effect. but this is a real loss, since the original loan contract was for 8% p/a for X years. In a different country like australia, a fixed term loan cannot be paid off without the expected interest. This is why i am confused as to what makes refinancing work - who eats the loss?
        Eddy_Viscosity2 3y ago
        Its not a loss, its an unrealized gain. What happens is they just don't get to have it, but they still get their principle returned as well as any interest up that point -- i.e. they made still made a profit.
  - Spivak 3y ago
    I think the exception to this is if you're underwater on your mortgage. Then the new bank won't give you a new loan against the house for more than its worth. This is of course stupid on the part of everyone involved but especially the person who currently owns your loan. Lowering the interest rate for a person with an underwater mortgage can only increase the security of it as a financial asset. If they default it's pure loss. But a new bank doesn't want to take on an underwater mortgage and even at the institution that owns your loan the left hand originating mortgages doesn't know what the right hand is doing servicing them.
- ptero 3y ago
  Not necessarily. It works if the value of the mortgage is less than the value of the house, which is the vast majority of cases.
- xwdv 3y ago
  Which aside from a few moments in history, is pretty much always the case. House values only go up.

In the US on 30 year fixed rates I understand you can refinance down without penalty. Can someone confirm?

by voisin 3y ago

In the US on 30 year fixed rates I understand you can refinance down without penalty. Can someone confirm?

Correct. You're essentially paying to originate a new mortgage (with the same originator as your previous or anyone else). Proceeds pay off previous mortgage, and no one can really tell you no. I'm not sure if any US mortgage can have prepayment penalties and be compliant? (for resale of the mortgage debt) Worst I've seen is "If you pay fully before X date, we'll charge you the closing fees we comp'd you originally."

nemo44x 3y ago
No mortgages don’t have early payoff penalties. The bank doesn’t really care. They’ve probably sold your mortgage off to be packaged in a bond anyways. They’re mainly in the business of selling loans. There’s a big margin on that. They’re more than happy to payoff your old one and write a new one and collect those fees.
- ethbr1 3y ago
  Is there anything that prevents it though? If not, I assume someone would have written a 3/1 ARM with predatory early repayment provisions, so I'm guessing there's probably a conformant mortgage guideline (e.g. from *Mac) that prevents clauses like that.

curiousgal 3y ago

Refinancing only works when the value of your house increased.

gorjusborg 3y ago
There's nothing about refinancing that requires your house value to increase. The concept is that you are taking out a loan to pay off an earlier loan. If you borrowed at 8% and rates dropped to 2%, you could refinance even if your house price dropped, and it would still make sense, as you borrowed what you borrowed, and still owe it. Now, if you are trying to refinance and take some money out from equity, sure, that relies on having greater equity than the loan value.
- chii 3y ago
  > If you borrowed at 8% so whoever lent you at 8% would take a loss if you could just abandon that rate and went with someone else's 2% rate. Therefore, it can't be this simple - somebody must be eating a loss. I suspect that 'somebody' is Freddie Mac and Fannie Mae , which is a quasi-gov't corporation and therefore, they might be able to take the loss without worrying about profitability.
  - Spivak 3y ago
    > so whoever lent you at 8% would take a loss Why would they? If I lend you $100 at 8% interest and for simplicity let's say it's an interest only loan so you only pay the interest I get $8/yr for my trouble. Then you refinance with someone else at 2% and I get my $100 back. All good, now it's available to me to loan back out. The only thing I've "lost" is future profits but you also could have just paid off the loan entirely in cash to the same effect.
    - chii 3y ago
      > The only thing I've "lost" is future profits but you also could have just paid off the loan entirely in cash to the same effect. but this is a real loss, since the original loan contract was for 8% p/a for X years. In a different country like australia, a fixed term loan cannot be paid off without the expected interest. This is why i am confused as to what makes refinancing work - who eats the loss?
      - Eddy_Viscosity2 3y ago
        Its not a loss, its an unrealized gain. What happens is they just don't get to have it, but they still get their principle returned as well as any interest up that point -- i.e. they made still made a profit.
- Spivak 3y ago
  I think the exception to this is if you're underwater on your mortgage. Then the new bank won't give you a new loan against the house for more than its worth. This is of course stupid on the part of everyone involved but especially the person who currently owns your loan. Lowering the interest rate for a person with an underwater mortgage can only increase the security of it as a financial asset. If they default it's pure loss. But a new bank doesn't want to take on an underwater mortgage and even at the institution that owns your loan the left hand originating mortgages doesn't know what the right hand is doing servicing them.
ptero 3y ago
Not necessarily. It works if the value of the mortgage is less than the value of the house, which is the vast majority of cases.
xwdv 3y ago
Which aside from a few moments in history, is pretty much always the case. House values only go up.