If you have a mortgage, there’s a good chance that you have it with your current bank. However, if you’re looking for a mortgage-refinancing loan, you might be surprised to learn that your bank isn’t necessarily the best option for this, even if you’re already happy with the service they provide for your mortgage.
The reason for this is fairly straightforward, although you may not have been aware of it – don’t worry, not many people are. Therefore, it’s wise to have an understanding of how banks work, especially when it comes to mortgage refinance loans, before you apply for one yourself.
Banks And Interest Rates
When you applied for your mortgage, you probably thought you were getting a great deal at 6.5% interest, or whatever average interest rate you received from your bank. The same might be said of any mortgage refinancing loan rate – it might be as little as 5%. However, this isn’t the full picture.
Since banks fund any types of loan with their own money, whether it’s a mortgage, a mortgage-refinancing loan or just a standard loan for a car or vacation, they can basically charge whatever they wish to, and change the interest rate whenever they wish.
This is due to two facts – the first is that the body that protects homeowners, the Real Estate Settlement Procedures Act (RESPA), does not govern banks. The other reason is that banks can also charge what is known as a Service Release Premium, or SRP.
How Does SRP Affect My Mortgage Refinancing Loan?
When you first took your mortgage out, you may have thought you had a good deal with the interest rate offered. You may even think that your bank is the best place to go to get a mortgage-refinancing loan, due to the great deal you got to start with. However, don’t be so hasty – that “great deal” you got from your bank could have, and should have, been even better.
Because banks work to their own rules, this allows them to participate in what many other lenders would call questionable practices, such as constantly raising interest rates, tying you into a mortgage that isn’t right, etc. One of the worst cases of this is SRP.
This is where banks actually “re-sell” your mortgage to a secondary lender, at a hefty profit to the bank. For example, say you got a mortgage (or a mortgage refinancing loan) at 6.5% - the real deal was probably closer to 6%, yet the bank knows that it can charge you more and still have you thinking you’ve got a good deal.
They then sell the difference onto the secondary market, so they are benefiting twice from you having your loan with them. And because the banks are exempt from the RESPA regulations, nobody is any the wiser (apart from the banks and their SRP’s, obviously). It’s worth keeping this in mind when you’re looking to take out a mortgage, or mortgage-refinancing loan – there are plenty of other options available to you, so make sure you find the right one.