Rates have fallen about 1/4 percent over the last few weeks and they are almost 1% lower than their peak only a few months back.
As a result, everyone is rushing to refinance again, as I mentioned in yesterday’s blog.
Mortgage lenders love the onslaught of business even though it fosters some major risks.
One of those risks is insufficient capacity and closing delays, as discussed yesterday.
And the other risk is massive Early Pay Off Penalties – something I blog about at least once per year.
Most mortgage banks make their money by selling their loans at a premium to other investors (often big banks) who either hold the loans or aggregate and securitize them.
And, all mortgage banks have agreements with those investors that state that loans purchased by the investors can’t be paid off for six months.
If they do pay off within six months, the investors can recoup all of the “yield premiums” paid to the mortgage bank.
In other words, if we fund a $500,000 loan and sell it to an investor for $508,000, if that loan pays off within six months, we have to pay back the extra $8,000 plus additional fees.
The six month “early pay off” rule is in place so investors can recoup some of the cost of the premium they paid for the loan.
To be clear, only lenders are subject to these Early Pay Off Penalties. Our borrowers are NOT subject to any prepayment or early pay off penalties.
BUT – these penalties can be substantial for lenders, often in excess of $10,000 and far in excess of the profits we made on a loan.
This is why we try to get commitments from our borrowers to not refinance for six months.
It is also why our team is very careful not to refinance borrowers out of other mortgage banks’ loans if they closed less than six months ago. We do not want other lenders to endure these penalties either.
If rates do fall after we close and borrowers want to refinance, we can lock them into a new refinance loan as soon as four months after close with a 60-day lock; we just can’t fund the new loan until six months after close.
In any case, we like to make sure that all of our borrowers and agent-partners understand how Early Pay Off Penalties work, and … six months is all we ask :).
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646