Should you refinance with Your Current Lender?

Borrowers who are looking to refinance face the dilemma of deciding where to take their business: do they stick with their existing lender, go elsewhere, or do they do both? Let's examine the advantages and disadvantages of using your current lender.

First the advantages: The main reason that people use their current lender is likely a matter of convenience. They don't have to deal with shopping around and making decisions. The lender has immediate access to their file and payment history, whereas new lenders would have to investigate and gather this information. There's a certain comfort level from already having done business with this person and company, and perhaps even a perception that this should afford them some kind of special treatment.

All of these things are true - to some degree. The current lender may be in a position to offer lower loan settlement costs than a new lender. The greatest potential for lower refinance costs arises in instances where the current lender originated and still owns the loan (in other words, the loan hasn't been sold to a third party). If the borrower's payment record has been good, the lender may forgo a credit report, property appraisal, title search, and other risk-control documents which are otherwise mandatory on new loans. Of course, this is strictly up to the lender.

On the other hand, if the current lender originated the loan but later sold it and is now only servicing the loan for the new owner, the potential for lower refinancing costs is less. A lender that's providing servicing for the loan's owner must follow the guidelines set down by the owner. For instance, if the loan was sold into the secondary market, then the guidelines that must be adhered to are theirs. While there may be provisions for some streamlined refinancing with less documentation, the discretion that's granted to the lender is extremely limited, as well as the potential for any significant cost savings.

Now some disadvantages: Perhaps the strongest argument against refinancing with the current lender is that he or she may not offer borrowers the market price. Because of the convenience factor, most people will simply opt to refinance with their current lender; and make no mistake, the lender knows this. Any settlement cost benefits that the current lender offers may only serve to draw the borrower's attention away from the fact that the loan's rate and points aren't very competitive.

Such above-market offers are especially likely if lenders take the initiative by soliciting their own customers. Those who do may base their loan offer on the borrower's existing rate. For example, if the market rate is 6%, the borrower with an 8% mortgage could be offered a 7% deal, which might very well be accepted. The lender's intent is to provide a savings over the existing loan that's attractive enough to discourage the borrower from looking elsewhere. At the same time, the lender gives up as little as possible.

Another problem facing borrowers who are dealing with their current lenders is that they may not get the best service available because the lender has no real interest in completing the transaction. Consider this question and you'll understand the reason: Why should the lender rush to convert an 8% loan to a 6¼% one?

Generally speaking, the best strategy for the borrower is to first check the settlement cost savings that the current lender can offer, and then shop the market by getting quotes from several other lenders. After getting the best price available, the borrower can then return to the existing lender to try to get a comparable deal.

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