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Lender Will Split the Difference If You Give Up Your 3% Mortgage Rate

October 30, 2023

You’ve probably heard of the mortgage rate lock-in effect, where homeowners are unwilling (or unable) to give up their ultra-low mortgage rates.

Also known as golden handcuffs, these low rates have arguably prevented many existing homeowners from moving, and certainly from refinancing.

But now one bank may hold the key to unlocking some of these borrowers with their so-called “split-the-difference” mortgage rate program.

As the name suggests, they’ll give you a mortgage rate in between your old rate and prevailing market rates if you apply for a new home loan.

This could lessen the blow of moving at a time when home prices remain near all-time highs and mortgage rates also hover close to 21st century highs.

Would You Be Willing to Move If Mortgage Rates Were a Little Bit Lower?

Glenville, New York-based TrustCo Bank has come up with a novel concept to get homeowners moving again, literally.

They’re offering below-market mortgage rates to existing home loan customers when they move into a new home.

The catch is that they have to pay off their old home loan, which likely carries a significantly lower interest rate.

The idea here is that the bank can get rid of a low-yielding mortgage while simultaneously giving their customer a more palatable mortgage rate in an 8% mortgage rate world.

It’s arguably a win-win situation for both bank and borrower, assuming the homeowner wants to move elsewhere.

The program works for TrustCo Bank because they’re a portfolio lender, meaning the loans they underwrite stay on their books after closing.

This contrasts the many nonbank lenders out there that originate loans and quickly sell them off to third-party investors.

And as you might suspect, banks holding billions in super-low-rate mortgages likely want to get rid of them as quickly as they can, as opposed to holding them to term.

So if they can give homeowners a little nudge, it could solve any duration mismatch the bank might be dealing with, where they’re lending cheap while bond yields skyrocket.

How the Split the Difference Mortgage Rate Program Works

As noted, you have to be an existing TrustCo Bank mortgage customer who is purchasing a new owner-occupied home to live in.

Let’s pretend you received your home loan from the bank a couple years ago when the 30-year fixed was averaging 3%.

You love your low rate, but you aren’t thrilled about your property. Or you simply want to move for one reason to another.

Enter the “Split-the-Difference” program, which considers your current rate, today’s rates, and gives you something in the middle.

To calculate this rate, first they subtract your rate (e.g. 3%) from prevailing market rates. We’ll call that rate 7.50%.

That gives us a difference of 4.50%, which is then divided by two to determine the split figure amount, or 2.25%.

This number is then added to your existing mortgage rate (3% + 2.25%) to come up with a split-the-difference rate of 5.25%.

If the rate happens to be an odd amount, it will be rounded to the nearest quarter percent. Unclear if that’s rounded both up and down though.

Regardless, as you can see a mortgage rate of 5.25% would be significantly better than a rate of 7.50%.

Is This a Good Deal for Existing Homeowners?

$500k Loan Amount Standard Rate
Interest Rate 7.50% 5.25%
Monthly Payment $3,496.07 $2,761.02
Monthly Savings n/a $735
Savings @ 60 months n/a $44,000
Balance @ 60 months $473,087.41 $460,747.39

On a mortgage with a $500,000 loan amount, we’d be talking about monthly savings of roughly $735.

Over a five-year period, that’s $44,000, and it would result in a lower outstanding balance due to the reduced interest expense.

Of course, you’d be giving up your old 3% mortgage in the process. But if you truly wanted/needed to move, it could be a favorable option versus other alternatives.

Still, you need to shop around to see what other banks could offer and you’d need to take a look at the closing costs involved.

One could also look into an adjustable-rate mortgage, assuming rates were similar/better and the closing costs lower.

But if you’re already a TrustCo mortgage customer, it’d be at least worth entertaining a rate quote to determine the potential savings.

As noted, they’re a portfolio lender that keeps the loans its originates. Don’t expect your average bank or mortgage lender to offer the same program.

Most mortgage companies don’t service their own loans, and thus do not have an interest in getting the old loan paid off ahead of schedule.

You’ve got to hand it to TrustCo though for getting creative at a time when mortgages have become a tough sell.

The bank primarily operates in the states of New York and Florida, with each state accounting for about half of total home loan production.

They funded nearly $1 billion in home loans last year, per HMDA data.

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