If you are considering refinancing your mortgage loan, consider switching lenders.
“Lender loyalty can be counterproductive if you don’t shop around for better rates,” says Heather McRae, senior loan officer for Chicago Financial Services. This is especially true in today’s refinance market, wherever lenders are aggressively competing to attract clients.
According to a Black Knight report, keeping lenders is at an all-time low. Mortgage servicers retained only 18 percent of the estimated 2.8 million homeowners who refinanced in the fourth quarter of 2020, the lowest proportion on record.
Here are the pros and cons of switching lenders when you refinance your mortgage.
Advantage: You can get a better mortgage rate
It doesn’t hurt to shop around, says David Mele, president of Homes.com. “Many lenders stick with their lender when refinancing because they are accustomed to them, but you should periodically shop around to make sure you are getting the best deal,” Mele says. “If your account is current, you may be able to get the lowest refinance interest rate with your current lender, but many lenders have different loan requirements.
However, you do not need to talk to every lender in town. Instead, McRae suggests that when examining your options, three lenders give you a quote. “I recently spoke with [a refinancer] who spoke with 11 different mortgage lenders, and that’s unnecessary,” he says. “You’re not going to get drastically different offers by going to a bunch of lenders.”
If your current loan manager issues mortgage refis (some don’t), McRae recommends getting a quote from them, but be prepared to provide a good stack of paperwork. “Many people falsely think that the application process is easier if you stay with your servicer, but in usual, you are going to have to provide the same information and documentation to your servicer that you would provide to a new lender,” he says.
Disadvantage: You don’t know how the new lender treats its customers
If you’ve cultivated a good connection with your lender, that’s no small feat. “Having someone to trust with your money is priceless, and your home is probably the most important investment you have. Therefore you want to make sure you trust the lender you work with,” says Todd Sheinin, director of operations at Homespire Mortgage in Gaithersburg, Maryland. “Some lenders handle their customers better than others.”
Reflect on your happening with your current lender. Sheinin advises considering questions such as, “Were you kept informed of everything that was going on with your mortgage? Do you feel you had your lender’s full attention? Did you get a good interest rate? Did your lender stay in touch?”
Having a responsive lender is supremely important when things go wrong, for example, if you need help applying for mortgage forbearance (borrowers with FHA loans, VA loans, or government-backed USDA loans can sign forbearance plans, which put their mortgage payments on hold until June 30) or need a loan modification.
Advantage: You can get lower closing costs
Closing costs for refinancing typically cost 2% to 5% of the new loan amount; on a $300,000 balance, that is $6,000 to $15,000, as some lenders charge higher fees for home appraisal, title search, and other services. Therefore, a different lender may give you lower closing costs than your original lender.
That said, some lenders “will be willing to offer a current, good customer a discount on closing costs to keep them as a customer,” says Sheinin. Depending on the lender, they could give a discount from a few hundred dollars to about $1,000 in closing costs.
One caveat: “I always advise people to be careful when a lender offers them a ‘credit’ to cover some or any of their closing costs,” says McRae. “That essentially always means there is a lower interest rate available.”
Disadvantage: You may be hit with a prepayment penalty
Although prepayment penalties have become less usual, some lenders still require borrowers a fee for paying off their mortgage ere the end of the loan term. The costs of prepayment penalties can vary widely. For example, some lenders charge customers a percentage (usually between 2% and 3%) of their outstanding principal. In contrast, others calculate prepayment fees based on the interest the borrower would pay on their loan for a certain number of months (usually six months).
Look for the phrase “prepayment disclosure” in your mortgage contract to see if your lender imposes a prepayment fine and, if so, how much it requires.
You are not required to refinance with your original lender, but whether it makes sense to switch lenders depends on your priorities, as well as the type and terms you are eligible for with a new lender.