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I believe so. Here are some interesting thoughts on this:

You talk to a mortgage adviser at (say) Wells Fargo bank. You are interested in financing, own > 50%, have 2 salaries (your wife + yourself) that represents more than 50% of the amount you want to refinance,  can make a 30% down payment and have an external income source (business) that is more than the two salaries combined. You and your wife have been in the same line of work for 20 years, and you have great credit. Indeed, you think that refinancing might be a bad idea as you could pay the full balance in cash, within three years.

Now before the mortgage agent starts actually looking at your numbers, the conversation goes like this:

[Agent] Can you guarantee that you will still have your job in three years?

[You] Nobody can guarantee that.

And the story is finished: you don't qualify. At least they have the courtesy of not wasting your time and provide a negative answer right away, after a 10-minute chat.

If you think a bit more about this, you are wondering - how can they make money by offering such low interest rates? After all, a bank is a business, and a business exist to make a profit. Could you offer a loan to someone for just 4% and hope to make money? No, it does not make sense.

Finding #1: Nobody gets a 4% loan because it is not profitable for the bank.

Note that they turn people down right away. It's not "bait and switch" where you are offered 4% and ends up getting 12% - this practice could be subject to a class action lawsuit. Instead, it is "bait and turn down". Quite likely, banks have government incentives to advertise these low rates, but no business interest in servicing them.

Finding #2: The 4% rate is fake. The real interest rate must be much higher.

Knowing that, you are happy to learn that your bank is not losing money in ridiculous loans. It also explains why home prices continue to fall: because the real interest rate keeps going up despite advertised rates.

Finding #3: If you have cash, you can lend money to a mortgagee, and offer a 9% interest rate.

Since no matter how great the mortgagee's credit is, he will be turned down everywhere except by private investors who don't have to comply with banking regulations. 

Finding #4: Banks could be more profitable by eliminating their mortgage departments.

Why don't they just do it? Probably because of government regulations and bad publicity.

Question: How do banks make money today?

I don't know. They try to sell you platinum bank accounts where all fees are waived, yet it looks to me like fees are now their only source of income. Could someone can better answer my question?

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Comment by Jean-Paul Rasson on March 6, 2012 at 9:08pm

The way banks make money on a mortgage rate with a 4% interest rate: they sell it to another bank X and get a commission regardless of interest rate. Then X sells to another bank Y. Then Y sells to Z. And Z either goes bankrupt or gets bailed out, and the cycle starts over again.

Comment by Amy on March 1, 2012 at 10:10pm
Maybe they offer a 3.8% refi only to homeowners who are a foreclosure risk, and turn down those who are not at risk. So if your finances are great, you should claim that you are about to go bankrupt, to get preferential treatment.
Comment by Hari Titan on February 28, 2012 at 6:44pm

Google ZIRP.  The near Zero Interest Rate Policy of the Fed.  Right now the Fed rates are nearly Zero.

Credit unions are now aggressively competing on mortgages and that may be driving down the profit margins.

Refis at a lower market rate should still be a no brainer because you will have lower payments and therefore lower default risk after the refi.

Maybe the banks know which jobs are being offshored next.

Comment by Vincent Granville on February 23, 2012 at 6:12am

Ronald: for a rate of 4% for a 30-year fixed mortgage (actually I was quoted 3.8%) to generate profit, it has to beat real inflation over 30 years and yet generate profit after taking into account salary of employees and overhead costs associated with having a mortgage division (offices, etc.) 

Evidently there are always people who will get the advertised rate (just like there are people winning the lottery), it's just that they are rare: with some Wells Fargo branches, it is impossible to get it even if you can make a 100% down payment. In that case, you pay in cash if you really want the house that badly, you don't need a mortgage. And it seems that this is more and more what people do. That's why so many of the houses that are  bought, are bought by investors, paid in cash, and turned into rentals. These investors don't care purchasing the cheapest, foreclosed houses in bad condition since they don't plan living in it.

Comment by Ronald Bjarnason on February 22, 2012 at 11:12am

It seems that you lack a fundamental understanding of how mortgages fit into a banks overall investing strategy.  The 4% mortgage is certainly not a mirage.  Having just refinanced below 4%, I can personally serve as a counter-example to each of the four points you have made.  Even without my counter-example, each of your points can be easily dismissed.
1. It is profitable for the bank, they get a 4% return on their money.  Maybe it's less than what they would like, but it IS profit.  And some people do get it, maybe not you, but that's not a proof that it doesn't happen.  You also have to remember that banks can borrow from the government for practically free right now, so a 4% profit on free money turns out to be a reasonable investment.

2. If you are talking about APR, it's going down as well (with the interest rates).  Home prices continue to fall because of the huge excess of houses on the market.  It's especially bad right now because the banks have just negotiated out of the foreclosure mess, so they can now put more homes back out onto the market, further lowering prices.

3. You'd have to provide evidence of this.  You are making an assumption that no one (independent of their credit) can get a bank loan for less than 9%.

4. (see point #1) Banks would love to make more than 4% on mortgages right now, but the other options are so bad, this is what their investors are willing to purchase (remember that these mortgages are re-sold as mortgage backed bonds).

Comment by Olga K on February 22, 2012 at 6:17am

In Canada, interest rates are even lower. This summer I got a mortgage with 2.09% interest. 

Banks are still making money because the base rate is lower than their rates AND (don't forget) before they were making way too much money, and now they are just making money. This is a very low risk lending and they do their due diligence. 

Not to mention that Internet banking and better profiling of the customers are lowering costs of doing business. 

Just my 2 c

Olga

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