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What is the incentive for a bank to refinance a mortgage at a lower rate?
1- Wells Fargo does not own our current mortgage.  They have bundled it and sold it as an investment. 2- They make their money from 'servicing' the loan.  Even if they only get $50 per month to service it (3% of our monthly payment), that adds up to $50,000,000 per month if they have a million homes under management.  That is $600 million per year for each million homes being serviced 3- Managing the escrow gets them additional profit, because they can invest it and earn 2-3%.  If 1,000,000 homes have an average balance of $2,000 in their escrow accounts, they can earn up to $60 per year, or $60,000,000 annually. 4- They make $1,000 every time they refinance the home.  This is the approximate profit after paying real closing costs.  Refinance those million homes, and you make a cool billion in profit! 5- They also want to be sure that they keep us as a customer.  By lowering our payment, they decrease the likelyhood that we will refinance with someone else, and we are less likely to default.  (Not that they lose if we default, because they don't own the loan!) 6- they make additional profit by paying off the old loan (they don't own it… remember), then packaging and selling the new mortgage.  Since they are selling it as a security, they sell for future value, meaning they sell our $200,000 loan for a valuation of $360,000.  This means that they sell for $200,000 PLUS some fraction of the additional $160,000.  Let's say they only want a 10% premium of the $360,000 valuation.  That means they sell our $200,000 loan for $236,000.  They pocket $36,000.  If they make a million of these transactions every year, that is $36 billion dollars in profit So… Wells fargo refinances one million homes every year, and they make: $36,000,000,000 initial profit for selling the loan (with absolutely no risk!), plus $1,000,000,000 for doing the loan $660,000,000 annually to service the loan (Very little risk, since it is being paid by the owner of the loan as a service fee) If they can retain the loans for their entire life (keep us from refinancing with someone else…), they can make $19,800,000,000 (that is 19.8 billion dollars in servicing fees) The profit they make in a refinance is much greater than the money then can make by holding the loan for 30 years.