Mortgage Interest Rates remain a full 1/2% higher than where they were on Monday, and 5/8% higher than where they were last week.
So, while the 10 Year Treasury Bond (government debt) remains in record-low territory, mortgage rates are up considerably as the industry tries to stem excess volume.
Early Pay-Off Penalties – Holding On To Loans For 6 Months
I blog about this relatively often because it is such a huge risk in our industry.
Mortgage lenders make money by selling their loans to “investors” on the secondary market for a premium/profit.
For example, if we fund a $500,000 loan today at 3.75%, we might be able to sell that loan to an investor on the secondary market for $508,000.
That extra $8,000 of premium is our “gross profit.” Our “net profit” might be as little as $1,500 after we net out our closing cost credits, loan-related fees (credit reports, software fees, etc.) and labor costs.
Here is the issue – if any of the loans we sell to investors pay off in less than six months, we have to pay back the entire premium, in addition to other fees, to the investor that bought the loan.
We recently got hit with an $18,000 penalty when a borrower’s loan paid was off in under three months.
One of the reasons the penalty was so large was the fact that we had to inflate the rate to get more premium (or rebate) to use to cover closing costs for the buyer (the buyer asked for a very large closing cost credit to save cash).
What made the situation particularly painful was the fact we only netted a tiny fraction of that $18,000 in profits; we have to close another ten loans at least to make up that penalty.
In any case, we ask all of our borrowers to please refrain from refinancing for six months after their transactions close simply because the penalties pose such a huge risk for us (and for all mortgage companies).
This is also why we never refinance borrowers out of other mortgage companies’ loans when those loans are less than six months old.
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