Crthuky

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

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.

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.