In most professions, an early payoff is a good thing. Not in mortgage lending.
An early payoff poses a huge risk to lenders and investors. But it can also eat into the loan officer's commission.
Early payoffs — when a borrower refinances or pays off a loan within six months of closing — are, thankfully, fairly uncommon.
Borrowers don't often immediately pay off their mortgage, or refinance so soon after closing. Completing the refinance process can take months, so a borrower would need to initiate the process almost immediately.
Rapidly declining rates — like a year ago, when rates fell 14 basis points between June and July — can prompt buyers to refinance. So can rapidly rising prices.
Eli Sklar, a senior loan consultant at LoanDepot, said that one of his clients recently took out a mortgage on a second home in the Hamptons from a brokered lender. Just this week, the client received an offer that was $1 million north of what they paid for the property.
If the offer goes through, Sklar could be on the hook for the commission — at least until his client purchases another home.
It could be worse, however. Heidi Sanchez, CEO of HS Solutions in Orlando, Florida, said that she once had two early payoffs in one month. One of her clients sold a house in Puerto Rico, and immediately paid off their mortgage loan.
"Nobody else took a hit, not the processors, appraisers, title company, or lender," said Sanchez. "We worked hard for that — but they made us pay back the commission and any lender credits."
The early repayments meant Sanchez had to cough up $17,000. After getting burned, she now advises her clients ahead of time to wait at least six months before refinancing.
So, LOs, are your clients being tempted to refinance by low rates within six months of loans closing? Or are home prices rising too fast to resist reselling? Drop me a line at gkromrei@housingwire.com!
Georgia Kromrei
Senior Mortgage Reporter
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