For those also wondering, I think I found the answer on the Freddie Mac website:harikaried wrote:why doesn't this happen more with refinances as well?
harikaried wrote:The premise is that home purchase loans are going to have higher interest rates than refinance rates anyway, so why not increase your initial home purchase loan's interest rate to get as much lender credits as possible knowing that you'll be able to refinance to a lower interest rate within a few years?
harikaried wrote:knowing that you'll be able to refinance to a lower interest rate within a few years
The amount of rate buy-up for the initial purchase loan will be greater because there are more costs.momar wrote:How do you know you will be able to refinance at a lower rate in the future?
The thing I'm not clear about is where the lender credits come from. Are these effectively through FNMA/FHLMC? The original lender makes money through origination and underwriting fees initially then recover the loan amount when selling the loan, e.g., to Freddie Mac, then continue to make money servicing the loan. The risk to the lender is the same indeed because they weren't really taking on much risk in the first place as long as they conform to the loan buyer's requirements.grabiner wrote:the risk to the lender is the same either way
I guess to be really explicit, after talking to 20 lenders for home purchase loans, many don't have prepayment penalties. Several told me without prompting that I could refinance right away, and this is after I asked for more lender credits. So the interest rate difference is going to be mostly the extra in the rate buy-up to cover purchase closing costs where one day you get a purchase loan with a high rate and the next day you get a "normal" no-cost refinance rate.tfb wrote:You may be stuck with that higher rate if rates stop going down.
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