Home Loan Question

[Woodruff]

Ok, so we're in the third year of our 5.25% fixed 30-year VA home loan. We've built up a tiny bit of escrow, and never missed a payment. My wife and I have started to talk about refinancing at a lower interest rate. Well, lo and behold, last week I get a call from our lender, saying that the VA has a program out that allows them to drop the interest rate on our home loan to 3.375% fixed and we can refinance now if we'd like to do so.

Well, of course we're going to do that, in the process of changing the 30-year loan to a 20-year loan (not changing the payments with the much lower interest rate, essentially).

So my question is this...WHY ON EARTH would my lender want to do that? By my most generous figures, they are losing a good $40,000+ by refinancing me at this point. I'm not a likely return-customer, as this was our first home purchase and we plan for it to be our last. What could they possibly be getting out of this (remember, they called me, we did not call them)?

What am I missing here?

[Lootifer]

Maybe theres hope after all? Naw dun be stupid.

Just a return customer thing; but not neccessarily mortgage area; they want your savings and any other banking stuff (assuming they offer those products). And word of mouth advertising is in vogue as well.

[Woodruff]

Maybe theres hope after all? Naw dun be stupid.

Just a return customer thing; but not neccessarily mortgage area; they want your savings and any other banking stuff (assuming they offer those products). And word of mouth advertising is in vogue as well.

Ok, I can see the word-of-mouth thing (and that part will work, actually). Our other banking stuff is all with another bank, and they know it (because of the making the payments automatic and all that stuff)...and it was never even suggested that we switch anything over.

[Lootifer]

Yeh the more I think about it the more im sure itll be word of mouth advertising orientated. Though it wont be hurting their other products im sure. Just not for you maybe

[Woodruff]

Yeh the more I think about it the more im sure itll be word of mouth advertising orientated. Though it wont be hurting their other products im sure. Just not for you maybe

It just seems to me like that's a lot of money to just be voluntarily throwing away on the hope of some word of mouth, though.

[Lootifer]

Well odds are they will be losing that $40k regardless. The real cost is only that of those who are too ignorant or lazy to refinance on their own. Which id guess is a small fraction of their customer base.

Then consider that word of mouth only has to result in one or two extra customers in a hundred and theyre still making money since mortgage customers are so high value.

[aad0906]

Ok, so we're in the third year of our 5.25% fixed 30-year VA home loan. We've built up a tiny bit of escrow, and never missed a payment. My wife and I have started to talk about refinancing at a lower interest rate. Well, lo and behold, last week I get a call from our lender, saying that the VA has a program out that allows them to drop the interest rate on our home loan to 3.375% fixed and we can refinance now if we'd like to do so.

Well, of course we're going to do that, in the process of changing the 30-year loan to a 20-year loan (not changing the payments with the much lower interest rate, essentially).

So my question is this...WHY ON EARTH would my lender want to do that? By my most generous figures, they are losing a good $40,000+ by refinancing me at this point. I'm not a likely return-customer, as this was our first home purchase and we plan for it to be our last. What could they possibly be getting out of this (remember, they called me, we did not call them)?

What am I missing here?

They do it to keep you as a customer. If they don't do it, you might go shopping for a much cheaper loan somewhere else. At least they know you're a solvent borrower.

[GBU56]

Ok, so we're in the third year of our 5.25% fixed 30-year VA home loan. We've built up a tiny bit of escrow, and never missed a payment. My wife and I have started to talk about refinancing at a lower interest rate. Well, lo and behold, last week I get a call from our lender, saying that the VA has a program out that allows them to drop the interest rate on our home loan to 3.375% fixed and we can refinance now if we'd like to do so.

Well, of course we're going to do that, in the process of changing the 30-year loan to a 20-year loan (not changing the payments with the much lower interest rate, essentially).

So my question is this...WHY ON EARTH would my lender want to do that? By my most generous figures, they are losing a good $40,000+ by refinancing me at this point. I'm not a likely return-customer, as this was our first home purchase and we plan for it to be our last. What could they possibly be getting out of this (remember, they called me, we did not call them)?

What am I missing here?

They do it to keep you as a customer. If they don't do it, you might go shopping for a much cheaper loan somewhere else. At least they know you're a solvent borrower.

The bank ain't losing any money, period. Banks today are getting money below 1%, so don't worry about them losing money on you. With your good credit rating the bank knows you'll be refinancing sooner than later. Just make sure your bank is NOT uploading fees for a quick profit from you. It's very competitive out there now and the banks want your business.

[Juan_Bottom]

^Exactly. I had customers that used a half dozen banks over a decade.
You can refi with another bank for better rates and they'll payoff your current mortgage and even offer you a larger loan.
But make sure to read over what your new rates are and the fees. Ask them what each fee is for and get specific. You can usually get rid of like $600 off the loan for Courier Fee, Closing Fee, Escrow Fee, Insurance, ETC. Courier fee should be about $40, closing fee is usually less than $200, and the other two are made-up fees that aren't for anything at all. Every bank is different so just ask specifics and pressure them to drop fees.
Also, avoid brokers. They'll charge you $4000 for nothing.

[Juan_Bottom]

Oh yeah, take your letter to another bank woodruff and ask them to beat it.

Then let the banks bid against each other. It's just like buying a new car.

[patrickaa317]

Ok, so we're in the third year of our 5.25% fixed 30-year VA home loan. We've built up a tiny bit of escrow, and never missed a payment. My wife and I have started to talk about refinancing at a lower interest rate. Well, lo and behold, last week I get a call from our lender, saying that the VA has a program out that allows them to drop the interest rate on our home loan to 3.375% fixed and we can refinance now if we'd like to do so.

Well, of course we're going to do that, in the process of changing the 30-year loan to a 20-year loan (not changing the payments with the much lower interest rate, essentially).

So my question is this...WHY ON EARTH would my lender want to do that? By my most generous figures, they are losing a good $40,000+ by refinancing me at this point. I'm not a likely return-customer, as this was our first home purchase and we plan for it to be our last. What could they possibly be getting out of this (remember, they called me, we did not call them)?

What am I missing here?

They do it to keep you as a customer. If they don't do it, you might go shopping for a much cheaper loan somewhere else. At least they know you're a solvent borrower.

This ^

[Night Strike]

They probably have to pad their numbers to show that they're willingly refinancing people who want lower interest rates for when the government comes to demand their numbers. And it'll probably look even better when they can tally in a veteran also.

[BigBallinStalin]

I think it's because they're socialists, and what has this country gone to? I don't know, but it certainly smells like Obama. They're gonna refinance the white people out of existence!

[Nobunaga]

... Investigate further Woods. 2.875 is doable now, at a fixed rate, for a 15 year refi. That's what I'm looking at right now with Minster Bank (current rate is 4.75 through Union Savings).

... But if you cannot save back the closing costs with the interest savings within 3 years, statistically it is unwise to refinance, or so I've read. And closing costs, as I'm sure you know, are not cheap.

... Good luck either way.

[patches70]

Best to be reading the fine print if I were you.

I assume you'll be cashing out the equity in your home?
Then understand this, the purpose is to keep you in debt. You look at it as saving 10 years off your mortgage, the bank is losing $40K or so in interest payments.
But see it from the other side. Say, for instance, your original mortgage was for $150K. You've brought the principle down to something like $125K.
You refinance, get $20K in cash but now your principle is back at $150K. And it is to be paid of in 20 years at a lower interest rate. The bank is still making money but they get you to stay in debt. That's the whole point.

I don't know what your actual situation is or the actual numbers, but don't even think that the banks are doing you a favor.
That $20K you get you'll spend, most of it, at least that is what they are thinking.
Now, if you ain't cashing out any equity and just refinancing your current principle and the savings on the interest rate cover the costs of your closing and fees, IDK, maybe that's a good thing. Paying less interest is always a good thing.
I imagine though, that the bank will want you to cash out your equity. Or push you in that direction, and it's just to keep you in debt.

Like the old saying, Beware Greeks bearing gifts, it applies just as well to stinking banks....

But, with due diligence it might be a good thing for you. You'll feel real good with a nice fact sum of digital numbers appearing in your bank account. Take the wife and kids on a nice vacation. Buy a car. Or, you could commit the mortal economic sin of saving.

Best of luck to you, of course.

[Woodruff]

Well odds are they will be losing that $40k regardless.

True enough...we were already talking between ourselves about moving to refinance. It almost makes me wonder if they have our house bugged!!!!!!!

The real cost is only that of those who are too ignorant or lazy to refinance on their own. Which id guess is a small fraction of their customer base.

Never underestimate the laziness of the average American. <chuckle>

Then consider that word of mouth only has to result in one or two extra customers in a hundred and theyre still making money since mortgage customers are so high value.

That is true.

[Woodruff]

The bank ain't losing any money, period. Banks today are getting money below 1%, so don't worry about them losing money on you.

But they factually ARE losing money by processing our refinancing in this manner. That is to say, sure they're still making money...but they absolutely are losing "relative money" in comparison to what they had with our previous mortgage.

With your good credit rating the bank knows you'll be refinancing sooner than later. Just make sure your bank is NOT uploading fees for a quick profit from you.

One of the many perks of a VA loan (which are very good loans). No fees. <smile>

[Woodruff]

^Exactly. I had customers that used a half dozen banks over a decade.

I was hoping you'd weigh in. I was going to PM you if you didn't.

Was hoping you'd know the magic insight I wasn't seeing, though. MAKE UP SOME MAGIC, DAMMIT!

[Woodruff]

... Investigate further Woods. 2.875 is doable now, at a fixed rate, for a 15 year refi. That's what I'm looking at right now with Minster Bank (current rate is 4.75 through Union Savings).
... But if you cannot save back the closing costs with the interest savings within 3 years, statistically it is unwise to refinance, or so I've read. And closing costs, as I'm sure you know, are not cheap.
... Good luck either way.

My escrow covers the minimal closing costs. No fees. But it's good to hear what you say about the 2.875%...I may have to go to the Teachers Credit Union to see what they can do (which is who my wife and I were talking about before we got the "our house is bugged phone call".). Thanks for that.

(Gotta be honest though...I'm pretty tickled about the rate they're giving us now. <smile>)

[chapcrap]

I didn't read through this whole thing because I don't want to, but here's my answer to the OP:

Lenders and banks don't actually hold the loans. They sell the loans to bigger, giant loan companies, so their part of the profit is just 0.2% or whatever. Let's say they give you a loan for 3.5%, they sell it to Quicken or whoever for 3.3% and get the rest. So, for them, it doesn't make much of a difference, but then they also get to charge all the closing costs as well. So, you save money, they make money, and Quicken or whoever gets screwed basically.

[Woodruff]

Best to be reading the fine print if I were you.

I assume you'll be cashing out the equity in your home?
Then understand this, the purpose is to keep you in debt. You look at it as saving 10 years off your mortgage, the bank is losing $40K or so in interest payments.
But see it from the other side. Say, for instance, your original mortgage was for $150K. You've brought the principle down to something like $125K.
You refinance, get $20K in cash but now your principle is back at $150K. And it is to be paid of in 20 years at a lower interest rate. The bank is still making money but they get you to stay in debt. That's the whole point.

Nope, the principal is staying right where it is (you're very close on your numbers, actually...nice guessing! <grin>). We're not getting the difference, nor do we want it (I want to pay off the loan, not put it back where it was). Our very minimal escrow rolls over into the new loan. We had the option of lowering our monthly payment to keep the loan at 27 years or keeping our monthly payment essentially the same (it went up by $20 per month) to drop off nine years from it.

I don't know what your actual situation is or the actual numbers, but don't even think that the banks are doing you a favor.

Truthfully, that's exactly what I was thinking. My tendency toward suspicion made me want to ask. And I figured I'd be wasting my time asking THEM. <grin>

Now, if you ain't cashing out any equity and just refinancing your current principle and the savings on the interest rate cover the costs of your closing and fees, IDK, maybe that's a good thing. Paying less interest is always a good thing.
I imagine though, that the bank will want you to cash out your equity. Or push you in that direction, and it's just to keep you in debt.

Zero pressure. It's been rather strange, to be honest...in a very pleasant way.

But, with due diligence it might be a good thing for you. You'll feel real good with a nice fact sum of digital numbers appearing in your bank account. Take the wife and kids on a nice vacation. Buy a car. Or, you could commit the mortal economic sin of saving.

Saving is for LOOSERS!!!! But there will be no saving or spending...just happily continuing on. <smile>

[KoolBak]

Many valid points were made....essentially, the best real answer is that they do not want to lose a qualified earning asset by you refi'ing somewhere else....period (I was a commercial lender for a nat'l bank for 15 years in a previous life....lol).

Simple test is checking the Effective (not nominal) APR which calculates in the cost of getting the loan to the flat percentage rate; it will be stated in black and white in the disclosure they have to give you up front according to the Truth in Lending Laws put down by Regulation Z....

Damn.....regurgitating all that crap just gave me a headache....thanks a lot! lol

Seriously though, you're lucky to have the VA option, which obviously you deserve ;o)

[Woodruff]

Seriously though, you're lucky to have the VA option

The VA home loan is a Higgs-Bosunsend, yes.

[Juan_Bottom]

I hadn't realized that it was a VA loan.
Don't trust the rate. They should always be under 6%, but I think that the national average is like 4.2 or something. I remember everyone was getting screwed with VA loans back in the day. With nice cred and no judgements or anything you should be well under 4% for a 30 year. Anyway, if I remember correctly VA loans are mostly done through a local bank, but the local bank isn't the actual lender. So the local bank wants you to refi at a better rate so that they can collect even more fees from you like more closing costs and document prep fees. So if you refi they will skim a few thousand bucks with little risk, and then they also get "collection fees" from the national bank by having you pay your mortgage to them. The lower rate will make you happy with them too, but really they are a middle man for a larger national bank. This is what I remember from VA loans. And I doubt that the rate that they are offering is the best that you can get.
I can't remember what the scheme is that makes this profitable for the larger bank. Typically they'll also collect closing fees, which allows them to make up some money by taking $2K or so off of the top. I'm guessing that they will lower your payments by giving you a better rate, but they'll do something with the number of payments that you have to make so that it will balance out. I dunno. But if you go to a different bank at a better rate they will actually have some profits to lose, so it also stands to reason that they actually want to give you the best rate that they can. That's especially true if your loan officer's pay is performance based.

I'm making sense here right?

[Woodruff]

I hadn't realized that it was a VA loan.
Don't trust the rate. They should always be under 6%, but I think that the national average is like 4.2 or something. I remember everyone was getting screwed with VA loans back in the day. With nice cred and no judgements or anything you should be well under 4% for a 30 year. Anyway, if I remember correctly VA loans are mostly done through a local bank, but the local bank isn't the actual lender. So the local bank wants you to refi at a better rate so that they can collect even more fees from you like more closing costs and document prep fees. So if you refi they will skim a few thousand bucks with little risk, and then they also get "collection fees" from the national bank by having you pay your mortgage to them. The lower rate will make you happy with them too, but really they are a middle man for a larger national bank. This is what I remember from VA loans. And I doubt that the rate that they are offering is the best that you can get.
I can't remember what the scheme is that makes this profitable for the larger bank. Typically they'll also collect closing fees, which allows them to make up some money by taking $2K or so off of the top. I'm guessing that they will lower your payments by giving you a better rate, but they'll do something with the number of payments that you have to make so that it will balance out. I dunno. But if you go to a different bank at a better rate they will actually have some profits to lose, so it also stands to reason that they actually want to give you the best rate that they can. That's especially true if your loan officer's pay is performance based.
I'm making sense here right?

What you're saying makes sense (intellectually), but I don't believe that's happening in this instance.

The bank ISN'T getting closing or other fees, and they aren't lowering our payments (payments went up by $20/month). The number of payments went WAY down (by many years).

I've scanned the documents, and there's nothing there that looks fishy to me in any way (which is why I'm suspicious! <grin>).

The VA definitely learned from those earlier problems that you mention, and have corrected those problems.

I am planning to talk to my Teachers Credit Union about a better rate though, because...well, because it can't hurt. The worst they can do is say no, and I don't expect them to.