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We are in the process of doing a refinance. However, we just took out the original mortgage loan recently. The new loan is 3/8 of a point better than the original loan and we are going to save a lot of money in interest payments.

I learned recently that this is going to cost the originator of the first loan quite a bit of money. I feel bad about it, but also, I didn't know at the time I started the refinance that there was a penalty for the originator if I pay off the balance of the first mortgage loan early; no one mentioned this during the process.

Is there etiquette around how I should handle this? Can anyone with knowledge of the loan origination industry explain how much money there is to be gained or lost in an early refinance? The first originator described the loss as "huge" but I don't know if they are exaggerating or what that would entail.

edit according to this answer the penalty may be between 1-3% of the loan value. Does that sound right? https://money.stackexchange.com/a/101707/84070

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    I always speak first to the current lender to see if they will match rate and do a no-cost refi or streamlined refi or whatever they want to call it. If not, then move on, why feel sorry for someone that is charging you more than the market dictates they should? – Hart CO Apr 4 at 15:40
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    Is it going to cost the loan originator in that they won't be making future profit off you, or is it going to cost you a penalty to get out of the original loan? The first sounds likely, but that's not your problem, the second also sounds likely and is your problem. – AndyT Apr 4 at 15:40
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    Apparently the commission for loan origination depends on how long the person holds the loan for. If the borrower pays back the loan early (as I am doing to refinance) they lose the commission. I'm trying to figure out what the exact details are as I'm not a loan originator. – Esta Close Apr 4 at 15:45
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    Welcome new user. I was just wondering, are you a personal friend of the loan originator person?? Or is it just "someone at the bank" ?? – Fattie Apr 4 at 16:51
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    So they're losing the commission on this deal, because the loan didn't last long. But if rates have recently dropped, then presumably people will be clamoring to refi, so new business (and new commissions) should be easily had in this market. I really wouldn't worry about them. – CactusCake Apr 4 at 17:24
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I have a friend who is a mortgage broker. At the company he works for, if one of his loans is paid off within 6 months of origination, he loses his commission. It's only happened to him a few times in 9 years, and he had to repay the commission on those loans in the form of future paycheck reductions. In his case 2 large loans happened in the same month after rates dropped significantly and he didn't get paid for 60 days. So it definitely can hurt the loan officer that sold you the loan.

I suspect they know this is coming though, as rates have dropped significantly this year.

I would contact your broker, explain the situation and see if they can refi for you. They may have contracts with their banks that don't allow them to, and if they can't then ask your broker what the cutoff date is and if it isn't too far into the future, consider waiting. If you don't want to wait that long, I think you should do what's best for you, but it may be nice to at least let your broker know so they can plan for it accordingly. Of course, you aren't under any obligation to notify them if you aren't comfortable doing so.

Update: regarding your last question, the broker getting a 1-2% commission is certainly plausible (though 3% seems a little high in the current market). You can figure on a 4% loan, in the first 6 months the bank makes just under 2% in interest. It's believable that a bank might be willing to pay the first 6 months of interest to a broker as a finders fee, but only if the loan lasts 6 months.

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    Thanks! I reached out and explained what is going on, and we're chatting about it. 6 months is probably too long for us to wait. – Esta Close Apr 4 at 16:10
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    @EstaClose - That's great. I think you've nailed the best possible etiquette by talking to the broker. – TTT Apr 4 at 16:12
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    While I guess it's good if you can with little cost to yourself support someone who'd otherwise potentially go without pay for months, I could also make the argument that you're propping up abhorrent business practices. Maybe more people need to pay off their loans early so brokers will learn not to get themselves into such terrible contracts. – curiousdannii Apr 4 at 23:55
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The first lender simply gets all their money back when you refinance - where is the "huge loss" in that? Then, they can lend that money to someone else, benefiting from closing costs once again.

So don't feel bad but pay close attention to all the associated costs and penalties, and weigh that against the savings in interest.

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    Nothing, it's entirely on the backend. Still if someone is going to be out 10X so I can save X, and I'd previously had a good relationship with that person, it seems less than ideal. I'm trying to figure out what the multiplier is. – Esta Close Apr 4 at 16:00
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    Regarding your first sentence, it's not the bank that takes the loss, it's the sales person losing their commission. – TTT Apr 4 at 16:35
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    @Barmar It's not really like that IMO. They are offered commissions based on the contract lasting for a certain amount of time. If they are getting the bonus and spending it before the contract reaches that time, it's kinda on them. Losing a commission that you haven't satisfied the conditions on isn't the same as being docked pay really. – JMac Apr 4 at 18:17
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    @JPhi1618 If your entire livelihood rests on commissions that can be legally taken away within 6 months due to customer decisions, then it's time to look for a new job, not try to convince your customers to take a worse deal. I have my doubts that they operate solely on commission; but if they do, even bringing up this issue to clients seems like bad business practice. The issue is that, if the money can still be taken away regardless your own actions, it's not safe to consider it money that you've "made". OP taking a worse deal because of someone else's lack of financial plans isn't fair. – JMac Apr 4 at 19:42
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    The originating company probably does that on purpose so they can guilt people into keeping higher-rate loans. – not_a_comcast_employee Apr 4 at 21:47
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It's helpful to take a holistic view of this business. OP's link to one of the answer on this site is pretty good albeit brief.

Your lender originates your first mortgage, and then sell it to some financial institutions, who might hold it or package it with other mortgages and sell the pool by pieces (securitized). All these transactions were priced with the market information such as interest rates (and the expectation of future rates) back then.

Now rates have unexpectedly dropped. This raises the value of all the existing mortgages, and benifits the buyers. However, without a prepayment penalty, from your perspective as the mortgagor, you have the option to prepay the mortgage and basically "buy it back" from whoever owns the mortgage now at the face value. (Of course you would fund that purchase with another mortgage, ie refinance, at a more favorable rate, and thus at a lower cost).

Essentially this is a call option that moved in the money and it makes all the sense for you to exercise this option. The buyers though certainly wouldn't like it as they are missing the opportunity to make more money (at the then interest rate vs. the currently lower rate). But keep in mind that investors in this business are all sophisticated institutions. They know the embedded options and the risk associated. In fact they often assumes a fixed percentage of mortgage would be prepayed no matter what. So all the "losses" are just a cost of business that they already baked into the assumptions and prices they charge and pay each other.

Still, you can see why lenders would prefer you don't refinance, and can set up the terms to try to steer you away (e.g. prepayment penalty). But I'm not sure how docking the loan officers' pay would help, other than incentivizing them to lie about refinance (as one of the comments pointed out). We see that a lot in car dealership too when they tell people you can't refinance in the first XX days.

But certainly in your case, you shouldn't feel responsible for the awkward position that the lender put their LO in.

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