Bank offered free interest rate reduction

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techland
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Bank offered free interest rate reduction

Post by techland » Fri Dec 21, 2018 12:25 am

So I have a few mortgages, for rental property and my personal home.

A few days ago I decided to start making some principal payments on my home. Since this must be done through the banks website (I normally just send a check), I decided to do a "test" principal only payment of $100, just to see how it works.

The very next day, I received a phone call from some mortgage advisor at the bank, and she left me a long voice message about lowering my interest rate. Of course I thought this was just some refinance offer, although I thought the timing was weird.
The day after that, I get an overnight fedex letter, saying that the bank is offering to reduce my mortgage rate by 0.25%. No Fees, No other changes in the terms of my loan. Simply a reduction in the interest rate. Of course I thought this was some kind of scam/gimmick, so I called my bank and talked to a few people, and sure enough it's just a reduction in the interest rate. Has anyone ever heard of banks doing this?!!

I know banks will do loan modifications like that for people who are under water, and at risk of losing their house. But in my case, I am in great standing with my bank (with multiple loans). My only guess is that their system detected me making a principal payment, and so through some automated mechanism, calculated that they will reduce my interest rate by X amount, in the hope that I will make less principal payments, so that they can make more money on the loan.

WanderingDoc
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Re: Bank offered free interest rate reduction

Post by WanderingDoc » Fri Dec 21, 2018 12:30 am

techland wrote:
Fri Dec 21, 2018 12:25 am
So I have a few mortgages, for rental property and my personal home.

A few days ago I decided to start making some principal payments on my home. Since this must be done through the banks website (I normally just send a check), I decided to do a "test" principal only payment of $100, just to see how it works.

The very next day, I received a phone call from some mortgage advisor at the bank, and she left me a long voice message about lowering my interest rate. Of course I thought this was just some refinance offer, although I thought the timing was weird.
The day after that, I get an overnight fedex letter, saying that the bank is offering to reduce my mortgage rate by 0.25%. No Fees, No other changes in the terms of my loan. Simply a reduction in the interest rate. Of course I thought this was some kind of scam/gimmick, so I called my bank and talked to a few people, and sure enough it's just a reduction in the interest rate. Has anyone ever heard of banks doing this?!!

I know banks will do loan modifications like that for people who are under water, and at risk of losing their house. But in my case, I am in great standing with my bank (with multiple loans). My only guess is that their system detected me making a principal payment, and so through some automated mechanism, calculated that they will reduce my interest rate by X amount, in the hope that I will make less principal payments, so that they can make more money on the loan.
If this is indeed a "no strings attached" offer. Take it. Today.

And by the way, the only person you are hurting by making principal payments on a low interest loan is yourself. The rate of return from home equity is always ZERO. Having $100 dollar bills behind your drywall that are yielding you $0, is never a smart move. The bank makes money either way. That money you are using to make principal payments could be used to instead growth your wealth.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

YoungBogle
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Re: Bank offered free interest rate reduction

Post by YoungBogle » Fri Dec 21, 2018 1:02 am

My local CU offers this as well. Providing link to legitimize this benefit.

https://www.becu.org/landing/loan-reprice

wootwoot
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Re: Bank offered free interest rate reduction

Post by wootwoot » Fri Dec 21, 2018 1:31 am


If this is indeed a "no strings attached" offer. Take it. Today.

And by the way, the only person you are hurting by making principal payments on a low interest loan is yourself. The rate of return from home equity is always ZERO. Having $100 dollar bills behind your drywall that are yielding you $0, is never a smart move. The bank makes money either way. That money you are using to make principal payments could be used to instead growth your wealth.
The rate of return is the interest rate of the loan. Paying down principle is like buying a bond that expires once your loan is paid off

HIinvestor
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Re: Bank offered free interest rate reduction

Post by HIinvestor » Fri Dec 21, 2018 1:55 am

Congrats! It’s great if there is a no strings attached offer to lower your interest rate with no prepayment is GREAT. I’d accept it ASAP.

I know folks say no benefit to paying off low interest loan/mortgage, but also no harm and it’s fine to be free and clear with no debt.

Our banks never ordered to lower our interest rate—we prepaid on our principal $500/mo so it would be paid off before H retired and have no regrets! Peace of mind and reduced fixed costs are great feelings and priceless imho.

alwayshedge
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Re: Bank offered free interest rate reduction

Post by alwayshedge » Fri Dec 21, 2018 6:10 am

A few things that come to mind..

The bank discovered an error in their lien and needs to correct it (perfect their lien). Lowering the rate by a nominal amount is an easy and quick way to fix this as it will surely require some kind of signature or authorization from you for a "change in terms". Make sure you read what you sign/esign carefully.

The bank simply lost your note and now needs a new one. Again, lowering the rate by a nominal amount is an easy way to get a new note. Ask them to see a copy of your current note. See if they can produce one...

The bank realized they are missing disclosures for you maybe through an audit and enticing you with a lower rate is an easy way to get updated disclosures.

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Watty
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Re: Bank offered free interest rate reduction

Post by Watty » Fri Dec 21, 2018 6:35 am

It was a while back but I once had Wells Fargo give me a free refinance offer when I had a higher than market interest rate. In my situation I was not sure I would be staying in the house long enough to break even with normal refinancing costs.

It was indeed free and they did not roll any costs into the new loan. The only catch was that the new interest rate was still higher than I could have gotten with a full refinance.

The way that they can afford to do this is;
1) They likely sold off your loan long ago and they are now only servicing it.
2) They will also sell your new loan and since it is above the current market rate they can make enough money when they sell it to pay for the closing costs and still make a profit.

I had a lot of home equity and good credit so there was very little risk in the new loan.

I did the refinance and it worked out fine but I did read all the paperwork closely to make sure that there were not any hidden gotchas.

This was long before Wells Fargo got into so much trouble for abusing their customers.
Last edited by Watty on Fri Dec 21, 2018 6:40 am, edited 2 times in total.

jminv
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Re: Bank offered free interest rate reduction

Post by jminv » Fri Dec 21, 2018 6:38 am

You should take the offer since it's no strings attached. Then keep paying down if that's what you want to do.

I received the same deal just before the last recession so it does happen. I was looking into refinancing my mortgage and while in that process, my own lender/servicer sent an offer for a 0.25% reduction, no fees and no strings attached. They even sent out a mobile notary at their cost. In my case, it was a better deal than refinancing the mortgage.

The lender could be anticipating that you're likely to refinance and/or accelerate paydown and that they want to keep your mortgage, for whatever reason. They could also be anticipating that rates will drop in the near future and that by doing this, you will be less likely to refinance when that occurs. It could also be that even with the new interest rate, your mortgage's rate will be above the market rate, in which case it makes sense for them to do this. Interesting thread since it brings me back to just before the last recession.
Last edited by jminv on Fri Dec 21, 2018 6:40 am, edited 1 time in total.

alwayshedge
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Re: Bank offered free interest rate reduction

Post by alwayshedge » Fri Dec 21, 2018 6:41 am

jminv wrote:
Fri Dec 21, 2018 6:38 am
You should take the offer since it's no strings attached. Then keep paying down if that's what you want to do.

I received the same deal just before the last recession so it does happen. I was looking into refinancing my mortgage and while in that process, my own lender/servicer sent an offer for a 0.25% reduction, no fees and no strings attached. They even sent out a mobile notary at their cost. In my case, it was a better deal than refinancing the mortgage.

The lender could be anticipating that you're likely to refinance and/or accelerate paydown and that they want to keep your mortgage, for whatever reason. They could also be anticipating that rates will drop in the near future and that by doing this, you will be less likely to refinance when that occurs. It could also be that even with the new interest rate, your mortgage's rate will be above the market rate, in which case it makes sense for them to do this. Interesting thread since it brings me back to just before the last recession.
9 out of 10 times it was because they lost/couldn't find the original note and therefore had an exposed loan. Or the existing note was deemed useless due to an error. This happened a lot during bank acquisitions/acquired loans.

Offering a rate discount is an easy excuse to get you to sign a new note and "perfect their lien". I work in the industry and saw this A LOT.

jharkin
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Re: Bank offered free interest rate reduction

Post by jharkin » Fri Dec 21, 2018 8:32 am

alwayshedge wrote:
Fri Dec 21, 2018 6:41 am

9 out of 10 times it was because they lost/couldn't find the original note and therefore had an exposed loan. Or the existing note was deemed useless due to an error. This happened a lot during bank acquisitions/acquired loans.

Offering a rate discount is an easy excuse to get you to sign a new note and "perfect their lien". I work in the industry and saw this A LOT.

SO out of curiosity (this has never happened to me ...sigh) does that mean the OP has some leverage in this situation to ask for even more? :moneybag

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Kenkat
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Re: Bank offered free interest rate reduction

Post by Kenkat » Fri Dec 21, 2018 8:38 am

Are you sure this isn’t a discount for making payments electronically? My bank offered a 0.25% rate reduction if I agreed to having my payment automatically deducted from my checking account every month. Just seems interesting that you made an online payment and suddenly received this offer.

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whodidntante
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Re: Bank offered free interest rate reduction

Post by whodidntante » Fri Dec 21, 2018 8:44 am

alwayshedge wrote:
Fri Dec 21, 2018 6:41 am
jminv wrote:
Fri Dec 21, 2018 6:38 am
You should take the offer since it's no strings attached. Then keep paying down if that's what you want to do.

I received the same deal just before the last recession so it does happen. I was looking into refinancing my mortgage and while in that process, my own lender/servicer sent an offer for a 0.25% reduction, no fees and no strings attached. They even sent out a mobile notary at their cost. In my case, it was a better deal than refinancing the mortgage.

The lender could be anticipating that you're likely to refinance and/or accelerate paydown and that they want to keep your mortgage, for whatever reason. They could also be anticipating that rates will drop in the near future and that by doing this, you will be less likely to refinance when that occurs. It could also be that even with the new interest rate, your mortgage's rate will be above the market rate, in which case it makes sense for them to do this. Interesting thread since it brings me back to just before the last recession.
9 out of 10 times it was because they lost/couldn't find the original note and therefore had an exposed loan. Or the existing note was deemed useless due to an error. This happened a lot during bank acquisitions/acquired loans.

Offering a rate discount is an easy excuse to get you to sign a new note and "perfect their lien". I work in the industry and saw this A LOT.
In that case, what mortgage?

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Ketawa
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Re: Bank offered free interest rate reduction

Post by Ketawa » Fri Dec 21, 2018 8:50 am

WanderingDoc wrote:
Fri Dec 21, 2018 12:30 am
And by the way, the only person you are hurting by making principal payments on a low interest loan is yourself. The rate of return from home equity is always ZERO. Having $100 dollar bills behind your drywall that are yielding you $0, is never a smart move. The bank makes money either way. That money you are using to make principal payments could be used to instead growth your wealth.
This is fundamentally wrong. Taken to its logical conclusion, your statement would support having either the largest mortgage possible (minimize home equity yielding you $0) or no mortgage at all (the bank makes money either way). I can't tell which.

In reality, principal payments are very similar to buying a bond with the same interest rate as the loan and a duration equal to the amount of time until the loan is paid off.

WanderingDoc
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Re: Bank offered free interest rate reduction

Post by WanderingDoc » Fri Dec 21, 2018 11:57 am

Ketawa wrote:
Fri Dec 21, 2018 8:50 am
WanderingDoc wrote:
Fri Dec 21, 2018 12:30 am
And by the way, the only person you are hurting by making principal payments on a low interest loan is yourself. The rate of return from home equity is always ZERO. Having $100 dollar bills behind your drywall that are yielding you $0, is never a smart move. The bank makes money either way. That money you are using to make principal payments could be used to instead growth your wealth.
This is fundamentally wrong. Taken to its logical conclusion, your statement would support having either the largest mortgage possible (minimize home equity yielding you $0) or no mortgage at all (the bank makes money either way). I can't tell which.

In reality, principal payments are very similar to buying a bond with the same interest rate as the loan and a duration equal to the amount of time until the loan is paid off.
From a financial/mathematical/rate of return perspective, adding principal payments to a mortgage is the worst possible thing you could do. Even worse in this low-interest-rate environment. The rate of return on home equity is always zero. It doesn't get any worse than that.

Don't listen to what Dave Ramsey says, every single person that I know that follows Dave Ramsey religiously is still struggling. I wonder why? Instead, I live like Dave Ramsey does, not do what he says. Once you're already very wealthy, then making a few bad decisions from a financial perspective won't matter. Pay your mortgage off completely in one shot, knowing that from a financial perspective this is still suboptimal since the rate of return on home equity is always zero. Just like you can afford stupid purchases when you are very wealthy, you can afford to pay off your mortgage for peace of mind. Even then, I would only pay off a personal mortgage and never a rental property's mortgage.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Ketawa
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Re: Bank offered free interest rate reduction

Post by Ketawa » Fri Dec 21, 2018 1:04 pm

WanderingDoc wrote:
Fri Dec 21, 2018 11:57 am
From a financial/mathematical/rate of return perspective, adding principal payments to a mortgage is the worst possible thing you could do. Even worse in this low-interest-rate environment. The rate of return on home equity is always zero. It doesn't get any worse than that.

Don't listen to what Dave Ramsey says, every single person that I know that follows Dave Ramsey religiously is still struggling. I wonder why? Instead, I live like Dave Ramsey does, not do what he says. Once you're already very wealthy, then making a few bad decisions from a financial perspective won't matter. Pay your mortgage off completely in one shot, knowing that from a financial perspective this is still suboptimal since the rate of return on home equity is always zero. Just like you can afford stupid purchases when you are very wealthy, you can afford to pay off your mortgage for peace of mind. Even then, I would only pay off a personal mortgage and never a rental property's mortgage.
Please stop spreading this misinformation. Your home itself may go up or down in price. You may have debts in the form of a mortgage that cost interest. Home equity does not have a rate of return.

WanderingDoc
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Re: Bank offered free interest rate reduction

Post by WanderingDoc » Fri Dec 21, 2018 1:08 pm

Ketawa wrote:
Fri Dec 21, 2018 1:04 pm
WanderingDoc wrote:
Fri Dec 21, 2018 11:57 am
From a financial/mathematical/rate of return perspective, adding principal payments to a mortgage is the worst possible thing you could do. Even worse in this low-interest-rate environment. The rate of return on home equity is always zero. It doesn't get any worse than that.

Don't listen to what Dave Ramsey says, every single person that I know that follows Dave Ramsey religiously is still struggling. I wonder why? Instead, I live like Dave Ramsey does, not do what he says. Once you're already very wealthy, then making a few bad decisions from a financial perspective won't matter. Pay your mortgage off completely in one shot, knowing that from a financial perspective this is still suboptimal since the rate of return on home equity is always zero. Just like you can afford stupid purchases when you are very wealthy, you can afford to pay off your mortgage for peace of mind. Even then, I would only pay off a personal mortgage and never a rental property's mortgage.
Please stop spreading this misinformation. Your home itself may go up or down in price. You may have debts in the form of a mortgage that cost interest. Home equity does not have a rate of return.
You are correct. Equity trapped in your home has no rate of return.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Ketawa
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Re: Bank offered free interest rate reduction

Post by Ketawa » Fri Dec 21, 2018 1:30 pm

WanderingDoc wrote:
Fri Dec 21, 2018 1:08 pm
Ketawa wrote:
Fri Dec 21, 2018 1:04 pm
Please stop spreading this misinformation. Your home itself may go up or down in price. You may have debts in the form of a mortgage that cost interest. Home equity does not have a rate of return.
You are correct. Equity trapped in your home has no rate of return.
It does not have a rate of return, as in the concept does not apply to it. Otherwise, explain how rate of return on your home equity could possibly differ from rate of return on your home itself.

WanderingDoc
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Re: Bank offered free interest rate reduction

Post by WanderingDoc » Fri Dec 21, 2018 2:23 pm

Ketawa wrote:
Fri Dec 21, 2018 1:30 pm
WanderingDoc wrote:
Fri Dec 21, 2018 1:08 pm
Ketawa wrote:
Fri Dec 21, 2018 1:04 pm
Please stop spreading this misinformation. Your home itself may go up or down in price. You may have debts in the form of a mortgage that cost interest. Home equity does not have a rate of return.
You are correct. Equity trapped in your home has no rate of return.
It does not have a rate of return, as in the concept does not apply to it. Otherwise, explain how rate of return on your home equity could possibly differ from rate of return on your home itself.
Of course that concept applies to it. You can choose the amount of equity you have in your home strategically. Any cash that is not stuck in your home is available to invest and earn a rate of return.

You can calculate return ON equity with any asset, be it a property or any other business. Rate of return FROM home equity is always zero, making it a poor financial decision to keep a lot of equity in a house that can be used for other investments.
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.

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Re: Bank offered free interest rate reduction

Post by JBTX » Fri Dec 21, 2018 3:10 pm

WanderingDoc wrote:
Fri Dec 21, 2018 11:57 am
Ketawa wrote:
Fri Dec 21, 2018 8:50 am
WanderingDoc wrote:
Fri Dec 21, 2018 12:30 am
And by the way, the only person you are hurting by making principal payments on a low interest loan is yourself. The rate of return from home equity is always ZERO. Having $100 dollar bills behind your drywall that are yielding you $0, is never a smart move. The bank makes money either way. That money you are using to make principal payments could be used to instead growth your wealth.
This is fundamentally wrong. Taken to its logical conclusion, your statement would support having either the largest mortgage possible (minimize home equity yielding you $0) or no mortgage at all (the bank makes money either way). I can't tell which.

In reality, principal payments are very similar to buying a bond with the same interest rate as the loan and a duration equal to the amount of time until the loan is paid off.
From a financial/mathematical/rate of return perspective, adding principal payments to a mortgage is the worst possible thing you could do. Even worse in this low-interest-rate environment. The rate of return on home equity is always zero. It doesn't get any worse than that.

Don't listen to what Dave Ramsey says, every single person that I know that follows Dave Ramsey religiously is still struggling. I wonder why? Instead, I live like Dave Ramsey does, not do what he says. Once you're already very wealthy, then making a few bad decisions from a financial perspective won't matter. Pay your mortgage off completely in one shot, knowing that from a financial perspective this is still suboptimal since the rate of return on home equity is always zero. Just like you can afford stupid purchases when you are very wealthy, you can afford to pay off your mortgage for peace of mind. Even then, I would only pay off a personal mortgage and never a rental property's mortgage.
You have a home, and a mortgage. They are two separate things. Your net worth will increase or decrease as your home value increases or decreases, regardless of the mortgage. Then you have a mortgage.

Whether or not paying off a mortgage makes sense really comes down to how it compares to what you do with the money and what risk adjusted return you get if you don't pay it off.

ColoRetiredGirl
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Re: Bank offered free interest rate reduction

Post by ColoRetiredGirl » Sat Dec 22, 2018 2:10 pm

Question: Is there a prepayment penalty in this offer? I am just curious.

mouses
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Re: Bank offered free interest rate reduction

Post by mouses » Sat Dec 22, 2018 2:41 pm

techland wrote:
Fri Dec 21, 2018 12:25 am
So I have a few mortgages, for rental property and my personal home.

A few days ago I decided to start making some principal payments on my home. Since this must be done through the banks website (I normally just send a check), I decided to do a "test" principal only payment of $100, just to see how it works.

The very next day, I received a phone call from some mortgage advisor at the bank, and she left me a long voice message about lowering my interest rate. Of course I thought this was just some refinance offer, although I thought the timing was weird.
The day after that, I get an overnight fedex letter, saying that the bank is offering to reduce my mortgage rate by 0.25%. No Fees, No other changes in the terms of my loan. Simply a reduction in the interest rate. Of course I thought this was some kind of scam/gimmick, so I called my bank and talked to a few people, and sure enough it's just a reduction in the interest rate. Has anyone ever heard of banks doing this?!!

I know banks will do loan modifications like that for people who are under water, and at risk of losing their house. But in my case, I am in great standing with my bank (with multiple loans). My only guess is that their system detected me making a principal payment, and so through some automated mechanism, calculated that they will reduce my interest rate by X amount, in the hope that I will make less principal payments, so that they can make more money on the loan.
I don't know why they're doing it, but I went into my Friendly Local Credit Union awhile back, to early withdraw from two CDs and use the proceeds to open higher interest rate ones at the same credit union (they did not have a new money restriction), and FLCU did not charge me an early withdrawal penalty, they bumped up the rate on the existing CDs (which were not bump ups.)

vested1
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Re: Bank offered free interest rate reduction

Post by vested1 » Sat Dec 22, 2018 2:55 pm

When I made a large principal payment this year I immediately got an unsolicited offer from the bank to recast the mortgage at a lower rate (-.5%), which is different than the great deal offered to the OP, because the recast would have reset the term to 30 years. Maybe after I make my next large principal payment next year they'll make an effort to keep the mortgage and offer me something similar with no strings attached.

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Re: Bank offered free interest rate reduction

Post by grabiner » Sat Dec 22, 2018 4:25 pm

WanderingDoc wrote:
Fri Dec 21, 2018 12:30 am
And by the way, the only person you are hurting by making principal payments on a low interest loan is yourself. The rate of return from home equity is always ZERO. Having $100 dollar bills behind your drywall that are yielding you $0, is never a smart move. The bank makes money either way. That money you are using to make principal payments could be used to instead growth your wealth.
You have the return on the wrong item here. The prepayment has a return on its own, independent of the home, at a rate equal to the interest rate.

Your home is worth $400K, and you have a $200K mortgage at 3% with 10 years left, and a monthly payment of $1931. You decide to pay $1437 against your mortgage now. You continue to make the same payments, but since the principal is lower, you pay less interest, and slightly more of each payment goes to principal. In 119 months, you have reduced the principal by $1931, which is exactly your final month's payment, so you avoid this payment entirely. Therefore, by paying $1437 now, you get $1931 in ten years.

This is a 3% return, not a 0% return. I still wouldn't recommend that at current rates, since you can earn more than 3% on low-risk bonds. However, raise the loan rate to 4%, and it now becomes a good deal to pay down the loan if you are not deducting the interest and are maxing out your retirement savings and you don't need the liquidity. (If you bought a bond instead of paying down the mortgage, you could sell that bond on the bond market; you can't re-borrow the mortgage on the same terms.)

The return is not on your home equity, which is the same after ten years whether you made the prepayment or not. In fact, the return had nothing to do with the loan being a mortgage; making a prepayment on a student loan at 3% or 4% would have the same benefit.

(edited to fix typo)
Last edited by grabiner on Tue Dec 25, 2018 10:42 pm, edited 1 time in total.
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Watty
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Re: Bank offered free interest rate reduction

Post by Watty » Sat Dec 22, 2018 4:54 pm

vested1 wrote:
Sat Dec 22, 2018 2:55 pm
When I made a large principal payment this year I immediately got an unsolicited offer from the bank to recast the mortgage at a lower rate (-.5%), which is different than the great deal offered to the OP, because the recast would have reset the term to 30 years. Maybe after I make my next large principal payment next year they'll make an effort to keep the mortgage and offer me something similar with no strings attached.
You can always keep making the same payment.

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techland
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Re: Bank offered free interest rate reduction

Post by techland » Sat Dec 22, 2018 5:23 pm

Nope, no prepayment penalty or anything. Simply a reduction in the mortgage interest.

After double and triple checking with a bank manager, I sent in the form.

My biggest question was why they need my permission to lower my interest rate, if no other terms are changing. There is no situation where someone would not want that. But they said due to legal reasons, any modification at all, even if they are just giving me back money, requires my approval.

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