Question by A.S: Refinance mortgage with no fees, but how is the lender making money?
My lender is offering me a lower interest rate and no lender fees. I know that if I go for this lower rate, my mortgage will reset back to 30 years. I am not keen about extending the life of the loan.
I don’t understand how the lender is making money from this refinance.
What is the catch, what is my advantage except that my monthly payment will be lower?
Best answer:
Answer by Yirmiyahu
Servicing fees
Underwriting fees
Other “garbage” fees
Give your answer to this question below!
they’ll be hidden in the closing costs
I can understand your concern about the lender offering you a new loan, at better terms. However, your lender is aware that many people are refinancing at low rates, so they are targeting potential customers. In general your lender does not hold on to the loans, but sells them in the secondary market. Therefore they make money by originating the loan and selling it. Some lenders also have servicing departments, but that is a separate issue.
Focus your efforts on finding the best terms available. Here is a brief explanation on why to refinance and lender fee financing.
The main reasons and advantages to a refinance are:
1. More affordable payments.
2. Lower interest rate.
3. Move from a risky mortgage loan to a stable product, for example from a ARM (Adjustable Rate Mortgage) to a FRM (Fixed Rate Mortgage).
30 Year Loan:
By moving to a 30 year loan you are obtaining a lower monthly payments. Given today’s current market, you should also be getting a lower interest rate. Whether that will translate into a lower overall financial cost depends on the amount of time you hold on to the loan.
If you can afford larger payments, then look into a 15 or 20 year loan. I recommend that you use the Bills.com refinance calculator at http://www.bills.com/refinance-calculator/ to see what kind of payments and savings you will have on different loan terms.
No Lender Fees:
Your second point relates to the fee structure of the loan. There are different types of fees including :
1. Lender’s fees: origination points, discount fees, application fees.
2. Third party fees: appraisal, title,
3. Escrow and prepaid fees: Insurance, property tax, and prepaid interest.
(This is not an exhaustive list of fees).
Some lenders offer “no fee” loans, but generally charge higher interest rates. Ask the lender or shop around with other lenders and check the amount of fees you would have with a lower interest rate loan. Then check the amount of interest you save per year. You can then calculate how long it will take you to recuperate those upfront lender fees. If you are short on cash you may be able to roll those fees into the loan. It will take a few years to recuperate those fees depending on the interest rate differential and lender fee structure: however, in general, if you stay in the house for more than 3 years, the lower interest rate is a better financial deal.
In order to find the best deal for you, shop around!