Correct me if I'm wrong. I understand that when I open a mortgage loan, some underlying bond is issued and purchased by some investors. When the rate is much lower and I refinance and close my previous loan, what happens behind the scenes? Is the underlying security closed at the same time? Or was it changed hands?
The underlying investment is usually somewhat independent of your mortgage, since it encompasses a bundle of mortgages, and not only yours. It works similarly to a fund. When, you pay off the old mortgage while re-financing, the fund receives the outstanding debt in from of cash, which can be used to buy new mortgages.