If it's too good to be true...
August 2, 2010 7:49 PM   Subscribe

Why would Wells Fargo call me to refinance to a lower interest rate? What's in it for them?

I have a mortgage with Wells Fargo. I got a cold call tonight to re-finance to a very attractive rate. The guy is at the local office where I got my original mortgage. The numbers look great but I have a natural hesitation to trust any deal that is pitched based on a cold call. What is the benefit to the bank to get me a lower interest rate? Is there a typical catch to this? He gave me the full closing cost, the monthly savings, the cost of the appraisal. All he needs is a down payment on the appraisal. What should I look out for? Is this too good to be true?
posted by spicynuts to Work & Money (21 answers total) 3 users marked this as a favorite
 
They get a couple thousand (usually rolled into the new mortgage) in fees.
posted by jeffamaphone at 7:51 PM on August 2, 2010 [1 favorite]


And rates and everything are subject to credit checks, the result of the appraisal, etc. Also, they may change the terms of the loan (for example it may not be a non-recourse loan).
posted by jeffamaphone at 7:52 PM on August 2, 2010


A few reasons: a) they earn fees, which will become part of your new principal; b) they sold your mortgage long ago, but now they can sell it again; c) they would rather your refinance through them than via some other bank, especially if it means you'll move your accounts elsewhere; d) they think it's so obvious that refinancing makes sense for you that you'll start shopping around.
posted by carmicha at 7:53 PM on August 2, 2010 [3 favorites]



Does your lender pay your mortgage insurance? If not, then you're free to change lenders and WF is just trying to keep a good customer.
posted by DavidandConquer at 7:54 PM on August 2, 2010


We did the refinance at home with WF and didn't have to do anything but get the thing notarized and send it back. It was really easy. I don't think we even had to get a new appraisal. This may be a different program for you but if it's called the same thing then it's simple. The other thing in it for them is they get extra years of payments from you.
posted by thorny at 7:56 PM on August 2, 2010


pretty sure my dad did this exact thing as a result of a cold call. iirc, it all worked out for everybody involved.
posted by nadawi at 7:58 PM on August 2, 2010


It restarts the amortization schedule, meaning that the majority of the payments you have made on your mortgage thus far have all gone to the bank, and very little has gone against the prinicple. If they get paid off early enough in the mortgage, it's not very different then an interest only mortgage.

The interest rate is far less important to the profit margin the banks make than the amortization schedule.
posted by 517 at 8:00 PM on August 2, 2010


It restarts the amortization schedule, meaning that the majority of the payments you have made on your mortgage thus far have all gone to the bank, and very little has gone against the prinicple. If they get paid off early enough in the mortgage, it's not very different then an interest only mortgage.

Exactly. They make all their profit up front. Another, simpler way to look at it is that by refinancing, you will be making payments to them longer. 30 years + whatever you've already paid them, instead of just the original 30 years.

Does it make sense to do it? Unless you *need* the cash flow a lower payment gives you, or unless the mortgage is only a couple of years old, probably not. Add up how much interest you will be paying from now until the end of the current mortgage, and see if that is lower than how much interest you will be paying with the new mortgage.
posted by gjc at 8:32 PM on August 2, 2010


Current mortgage will be 2 years old in October by the way. Additional points of note:

1) I intend to pay off the mortgage within 15 years
2) The extra 3 to 400 bucks a month would be very useful
posted by spicynuts at 8:40 PM on August 2, 2010


I say do the math and if it makes the house cost you less all-in, then go for it. Figure the total value of your existing loan, principal +interest over the life, then do the same for the new one, and if it clears up some bottom-line, go for it. Interest is just vaporizing your hard work. If you can bring it down overall, that represents work you don't have to do in the long-run.
posted by Devils Rancher at 8:56 PM on August 2, 2010


Interest rates are low. Financial reform has passed finally, so regime uncertainty has fallen. Now that it's largely cleared up, the gears are slowly turning.

gjc: "Exactly. They make all their profit up front. Another, simpler way to look at it is that by refinancing, you will be making payments to them longer. 30 years + whatever you've already paid them, instead of just the original 30 years."

Unless the loan includes a penalty for prepayment, I would argue that your point is mitigated by education. spicynuts, if you keep making the same monthly payment you make now, your loan will be paid off sooner if the interest rate lowers. There's no rule saying you have to make the minimum I can't give you specifics without a contract to read, but this is just basic finance.

The caller though is going to earn a commission, and there will be other fees, so the details are what will make or break this. Develop a plan, review the contract to make sure your plan is okay, and then make a spreadsheet to calculate whether it's a good deal or not. Also, make sure you're actually dealing with Wells Fargo.
posted by pwnguin at 9:04 PM on August 2, 2010


In many states, including California, if you only have a first mortgage (and no second mortgage and no home equity line of credit and you've never refinanced) and then for whatever reason you default and decide to "jingle mail" your keys back to the lender, they cannot come after you for the rest of debt. It's a non-recourse loan.

But if you refinance your mortgage, your non-recourse loan magically becomes a recourse loan, and if you jingle mail them after that, they can come after you for a hefty judgment.
posted by Asparagirl at 9:46 PM on August 2, 2010 [1 favorite]


What's in it for them?

It restarts the amortization schedule...

Exactly. They make all their profit up front....


This seems potentially misleading to me. On any given month, the interest part of the payment = 1/12 of the loan's annual interest rate * the remaining principal, regardless of whether you're on the first month of the loan or the last. If you're currently 10 years into a 30-year mortgage and refinance into a 20-year mortgage (keeping your payoff date the same) at a lower rate, the bank does not then get a windfall of interest money just because the loan is new. In fact, the interest amount gets smaller, even on the first payment of the new loan, as does your payment. At the same time, you will also build equity slightly faster.
posted by jon1270 at 4:02 AM on August 3, 2010


If you're currently 10 years into a 30-year mortgage and refinance into a 20-year mortgage (keeping your payoff date the same) at a lower rate, the bank does not then get a windfall of interest money just because the loan is new. In fact, the interest amount gets smaller, even on the first payment of the new loan, as does your payment. At the same time, you will also build equity slightly faster.

Nowhere did they say they were refinancing into a mortgage with a different term. If the bank is cold calling, I think we can safely assume we are talking about a mortgage with the same, or longer, term as the original one.

This seems potentially misleading to me. On any given month, the interest part of the payment = 1/12 of the loan's annual interest rate * the remaining principal, regardless of whether you're on the first month of the loan or the last.

You are exactly correct, from the perspective of the borrower, on a pure cost of servicing debt basis. But if you look at the loan from the perspective of the bank, which is what the question is, you can see why the bank would like you to refinance.

From the perspective of the bank, your mortgage is an annuity. They give you $100,000, and over 30 years, you give them back damn near $300,000. They would like to extend the length of time you are paying them money. If they get you to refinance 10 years in, they aren't out any extra money, and now you are paying them for 40 years.

Fees may be a part of it, as well as booking new business that makes their year look better. I also think there are new accounting standards that make their books look worse if the original sale price of the house is more than it is worth now. I believe it hurts them (somehow) to have a $400,000 loan on the books for a building that's only worth $300,000, even if the balance on the loan is only $200,000. Book to value, I think.
posted by gjc at 6:35 AM on August 3, 2010


I think we can safely assume we are talking about a mortgage with the same, or longer, term as the original one.

Yeah, I'm not assuming that. Even if that's what the bank would prefer (and I'm not convinced the bank cares one way or the other), there's no reason the customer needs to fall for it.
posted by jon1270 at 7:00 AM on August 3, 2010


Also:

They give you $100,000, and over 30 years, you give them back damn near $300,000

For that to be true, the interest rate would have to be 9.4%. Current rates are less than half that. (Which is not to say that $80K in interest over 30 years is nothin', of course.)
posted by jon1270 at 7:18 AM on August 3, 2010


It is indeed the same term as original. Regardless, I will not be in this place for more than 10 years
posted by spicynuts at 7:57 AM on August 3, 2010


It may or may not be worth it, depending primarily on the amount of the loan, your current interest rate, the new interest rate and the costs you'd incur to refinance (bank charge, points, appraisal, title fees). As pwnguin suggested above, the devil will be in the details.
posted by jon1270 at 8:08 AM on August 3, 2010


After comparing amortization tables, the savings in interest after 30 years is about 50,000 dollars. Minus let's say 6k for re-financing (closing cost plus appraisal plus whatever other bullshit) call it 44,000. Seems decent to me.
posted by spicynuts at 8:28 AM on August 3, 2010


Yeah, but if you sell in <10 years, the last 20+ years of the amortization schedule are immaterial. How much will you save in the first 10 years?
posted by jon1270 at 8:35 AM on August 3, 2010


Wells Fargo may be *servicing* your mortgage, but they may not be the ultimate recipient of the principal and interest payments you're currently making.

Chances are high that your original mortgage was bundled into a mortgage backed security and sold off somewhere, with Wells continuing to service it.

Thus, Wells is likely strictly interested in the fees they can collect on your refinancing.

Whatever entity bought the mortgage backed security is going to have to deal with the issue of having their principal paid back earlier than they might have preferred and having to find a place to re-invest it....
posted by de void at 11:17 AM on August 3, 2010 [1 favorite]


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