Month: March 2021

Mortgage Refinancing—What’s the Catch?

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Why would my current lender encourage me to refinance for a lower rate?

I recently came across a question by a neighbor who wondered about the motive of their current lender in encouraging them to refinance their mortgage for a lower interest rate:

My current lender is sending me a lot of communications to refinance with a lower rate.

I’m trying to determine why my current lender would try to reduce the interest rate. If it’s someone else, I can understand: they are trying to earn new business. But I’m not able to figure out what’s there for current lender—apart from usual fees etc.

What’s the catch here? What does the lender gain by refinancing my existing loan with lower interest rate?

This is a legitimate question. On the first look there seems to be something fishy going on here. Why would a lender willingly accept reduced interest payments on the mortgage note they hold?

Mortgage lifecycle

Before we try to answer the question, let’s keep in mind what happens during the lifecycle of any normal mortgage loan.

  • The loan is originated. Money is lent and the borrower gets the capital to pay for their real estate purchase. The paperwork starting from the application all the way to closing of the loan is taken care of by the origination department, be it a mortgage company, a bank, a credit union, etc. They get paid for this service along with other service providers in the process like the title company, the county registrar and so on. Often these expenses are passed on to the borrower in the form of closing costs. Sometimes the lender absorbs these costs in return for a slightly higher interest rate than what it could have been.
  • Once the origination is complete, the mortgage can be sold in what is termed secondary market where these transactions are unseen by the borrower. The secondary market is complex and doesn’t have to be understood by the borrower. Regardless of who actually owns what part of the loan, they will be earning the interest rate agreed upon during the origination process.
  • In order to keep the backend ownership and changes in that ownership opaque to the borrower, there is a mortgage servicer who actually takes in the borrower’s monthly payments on behalf of the actual owners. They take care of distributing these monthly payments accordingly.
  • The servicer, the borrower-facing business, can change over time as well. One servicer may sell the account to another and the borrower would then make payments to a different business, but keeping to the origination agreement.
  • Home mortgage agreements normally contain no prepayment penalty. This means the borrower can payoff the outstanding loan amount any time and will not incur any penalty for the lost income stream to the lender. This means that the loan can be closed out at any point in time and the lender needs to be prepared for it. On a payoff, the loan ceases to exist.

Borrower’s perspective

Let’s take a look at the above from the viewpoint of a borrower:

  • The borrower applies for and obtains a mortgage loan with certain terms. These terms are generally the interest rate to be paid on the outstanding capital and how long the payments can take in time. Typical durations are 30-year and 15-year periods from the time the loan was originated.
  • The borrower makes monthly payments to the loan servicer on record. The amount paid is in accordance with the agreement at the time of origination.
  • Even with a significant capital still outstanding, the borrower can payoff the mortgage by refinancing, that is borrowing, using a new set of terms, enough money to pay off the earlier mortgage. Note that there is no assumption that the new lender must be different from the original lender.

The original question

Now, back to the question that started it all.

Why would a lender actively encourage a borrower to refinance in order to reduce the interest rate?

We will never know the true answer, but it is normally without any malice. Some of the possible reasons:

  • Different departments may handle mortgage origination and mortgage servicing, and they may not talk to each other. The origination department may be unaware that they are acting to reduce the earnings on the current mortgage note held.
  • Lenders expect borrowers, as a rule, to refinance to reduce their interest rate by watching the market. As a result, to earn the origination fees, it is good practice to promote without worrying about whether the borrower already has a mortgage loan with the organization. If they don’t promote, someone else’s promotion may prevail!
  • The origination department is aware of the current relationship with the borrower, but may seek a new loan anyway to retain them as a borrower, with the possibility of increasing the capital or loan duration, or both.

Therefore, the borrower should not try to second guess why they received a promotion. Rather, they should use it as a stimulus to take a look at the market; evaluate and decide for themselves whether there is any reason to consider a refinance at that time.

Sounds good. How to evaluate?

This is a huge topic. It deserves its own discussion. We’ll cover it in a future post. As a glimpse of the issues involved, let me mention a few:

  • Fixed vs. Adjustable mortgages
  • 15 or 30 year mortgage? (Or others too, like 10 year, 20 year and the like)
  • Monthly payments change
  • Total interest payments
  • Cash-out financing
  • Why increasing your interest rate may even be justified
  • Break-even analysis
  • and more …

So, as long as you follow the steps to evaluate your needs and come to a decision using your own analysis, there is no need to second guess why a particular lender is asking you to refinance. Their promotions are just reminders for you to be constantly vigilant.

The man who influenced four nations for over 20 years as the sole resident of a 134-room building

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The year was 1966 when this period of his life started. October 1, 1966, to be exact.

For many years, he had a few co-residents who participated in this process as well. This group of people first became residents of this building in 1947. But all of the others left, at different times, finally leaving him in charge of his peculiar role.

The funny part is that it was not even his own idea to exert all this influence. He sort of fell into this fateful role when he embarked on his solo flight to Scotland as far back as 1941.

This man was none other than , Deputy Fuhrer of the Nazi Party, second in command behind Adolf Hitler in the Nazi Germany between 1933-41.

The building he had occupied as the sole resident was none other than the which was built in 1876.

Changing of the Guards at Spandau Prison
(Used with permission from )

A 134-cell structure that had held as many as 600 inmates at times, Spandau was relegated to hold just seven inmates post World War II for their war crimes. Situated in West Berlin, it was located in the section controlled by the British. Spandau was operated by the World War II victor nations of France, United Kingdom, United States, and Union of Soviet Socialist Republics and the guard duty rotated among them.

Deputy Fuhrer Hess is purported to have reached Scotland on a solo flight mission in 1941 to engage Britain in peace negotiations with Germany. But he was held a prisoner in the U.K. until Germany surrendered unconditionally in 1945. He was later transferred to Nuremberg for the trials by the war crimes tribunal. He was sentenced to lifetime imprisonment at Spandau along with six others.

Between 1954 and 1966, all the other six prisoners were released. Hess was the sole remaining prisoner.

There were several attempts over the years by family members to release Hess on humanitarian grounds, and every time the soviets vetoed the idea. Being the last prisoner at Spandau, Hess was their only excuse to retain visitation rights to West Berlin. They were not going to relinquish it.

Hess had attempted to commit suicide multiple times, in Britain as well as at Spandau, but was unsuccessful. Finally, on 17 August 1987, at the age of 93, he did commit suicide and died in prison. The prison had lived out its usefulness to the nations involved at that point.

Before another use can be proposed for its existence, the British took swift action and demolished the prison in the same month, August 1987, in a mere 14 days! The Soviets lost their claim on their West Berlin presence.

I first learned of this stalemate situation in 1975 when a fellow student in college was describing how that prisoner (didn’t know his name then) was never going to get out of that prison. The political leverage was too dear for the Soviets who held a veto power.

Noting that Hess had attempted suicide multiple times, and wanted to be released multiple times, loneliness in the prison seems to have been the harshest punishment he endured. All accounts seem to indicate he had been treated well and had freedom to move around in the prison grounds. But not having interactions with other people, for over 20 years, must have taken its toll.

Interestingly, around the same time that Hess went through this solitary confinement in a genteel setting, another man went through harsh, physically abusive, confinement for political reasons. Nelson Mandela, who endured such treatment for 27 years in South Africa, did emerge out of prison eventually and enjoyed Presidency shortly thereafter.

A comparison of these two men offers a stark difference in their circumstances and almost explains the turn of events.

Hess, as Deputy Fuhrer during 1933-1941, arguably the darkest period of life in contemporary Europe, clearly subscribed to racist doctrines.

Mandela, a political prisoner incarcerated for opposing racism, eventually blossomed.

The course of history may be meandering, but has reached an understandable endpoint in both the cases.

Actions do have consequences.

Sundial Bridge: A Sight to Behold

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I stood mesmerized by the sleek, slanted, gleaming white column brightly lit by the evening sun against the clear blue sky. The cables tying the column to where I was standing, a pedestrian bridge across the Sacramento River in Redding, California, with see-through glass panels for the deck, made it all the more intriguing and aesthetically pleasing.

I got the first glimpses of the Sundial Bridge when a friend of ours had visited and posted its pictures years ago. 

Design

Designed by Santiago Calatrava, a Spanish Swiss architect of renown, the bridge sports a massive tower. As a structural engineer, Calatrava has a long list of projects around the world known for their architectural statements. The tower, slanted at 42 degrees, appears to reach for the heavens.  It acts as a cantilever and counterbalances the weight of the bridge with the help of the 14 cables. The strength and integrity of these cables are vital. They support both the tower and the bridge and keep them in place. Their visual aesthetics are what we see and enjoy as we take a stroll.

Interestingly, this bridge uses gravity in a creative way. The conventional design has supports on either bank (and sometimes more) of a river. This keeps the deck of the bridge from collapsing due to gravity. Calatrava’s design uses the gravitational pull on the bridge as well as the pylon tower to cancel each other through the tension in the cables. 

I visualize these by picturing two yoga poses: the plank and the modified boat pose. Plank exemplifies the conventional bridge where the torso and the legs act like the deck of the bridge with firm supports on both sides, namely the feet and the hands (or elbows depending on how the yogi does it). The modified boat pose I am thinking of is where the body is in the boat pose but the hands are grasping the legs. In this picture, the legs are the bridge deck and the upper body is the pylon, with the hands acting like the cables that help the two parts counterbalance each other.

While it looks sleek and inviting, the cantilever design is not as strong as the regular construction. Think of someone pushing the yogi in the poses above. It would take considerable effort to push a yogi in the plank pose to fall over. But it is quite easy to do the same to the yogi in the boat pose. The Sundial Bridge endures this reduced stability due to the cantilever design. But as it serves just pedestrians and bicyclists and the challenges to stability are more manageable.

Aesthetics and Driving Traffic

The engineer in me marveled at the delicate details of the construction. But the artist in me just saw the aesthetics and the ambience on that cloudless, balmy, summer day. 

The evening sun adding shimmer to the full flow of the Sacramento River

The emphasis on aesthetics at the expense of robust engineering appears deliberate. The project started in the early 1990’s with a goal of increasing tourism in the Redding area. It was a conscious decision to add a bridge where there was none before and drive more traffic to the area. The project ended up costing eight times the original estimate. But it was successful after its opening in 2004. Visitations rose 42% in the first year. Millions of dollars’ worth of commerce and tourism ensued each year thereafter. 

Sundial Bridge cares about ecology

One of the design decisions was to leave the river free of obstructions for salmon to migrate up the river during the salmon run. The Sacramento River offers an important spawning habitat for the Pacific Salmon that swim upstream to multiply for the next season. 

The 700-foot span of the bridge has no touch point in the river itself. The cantilever design made this possible, as seen below.

The cantilever design leaves the river undisturbed

Translucent glass panels on the deck of Sundial Bridge

Another aspect of the bridge that’s special is the translucent structural glass panels that form the deck of the bridge. These allow light to pass through them, and this is supposed to maintain the natural environment as intact as feasible (by not blocking sunlight) for the salmon in the water. (Photo on the right by  Razster at the English Wikipedia)

But the bridge is lit from below in the night. That ruins the advantage of translucence; it compromises the night experience for the salmon! The only beneficiary seems to be the pedestrians and cyclists who would have light in the night for their own safety and enjoyment.

The Sundial

Keeping with the theme of entertaining tourists, another twist in the construction adds to the experience: The sundial. The 42-degree angle of the cantilever tower, as it is pointing precisely North, opens up the possibility of a sundial. There is a sundial patch built into the grounds. The shadow moves about one foot per minute, so you can see it move! But it may be that it is more of a talking point than of any utility. It indicates the correct time on only one day of the year: the summer solstice, on June 20 or 21. Regardless, it gives the bridge its catchy name.

Sundial Bridge: A Worthwhile Stop

All in all, the Sundial Bridge lives up to its purpose. It attracts tourists with interesting architecture, beautiful views of the Sacramento River and fun with the sundial. It is situated in the city of Redding with quick and easy access from Interstate 5. Yet, it is secluded and shielded from city noise for a peaceful sojourn. 

I am glad I went and enjoyed the bridge and the surroundings on a summer day. I think I will visit it again, this time on the summer solstice, to experience the sundial in precise action!