If you are considering refinancing your home loan, consider switching to a new mortgage lender.
“Loyalty to the lender can backfire if you don’t shop around to see if there are better rates,” says Heather McRae, senior loan officer at Chicago Financial Services. This is especially true in today’s refi market, where lenders compete aggressively to win over customers.
According to a report by Black Knight, lender retention is at an all-time low. Mortgage managers (read: the company that collects your mortgage payment) retained just 18% of the estimated 2.8 million homeowners who refinanced in the fourth quarter of 2020, the lowest share on record.
Here are the pros and cons of switching lenders when refinancing your mortgage.
Advantage: You could get a better mortgage rate
It never hurts to shop around, says Dave Mele, president of Homes.com. “A lot of borrowers stay with their lender when refinancing because they know them well, but you still want to compare quotes to make sure you’re getting the best deal,” says Mele. “If your account is in good standing, you may be able to get the lowest refi rate with your current lender, but different lenders have different lending requirements.”
However, you don’t have to talk to every lender in town. McRae suggests getting quotes from three lenders when considering your options. “I talked to [a refinancer] recently who spoke to 11 different mortgage lenders and it’s totally unnecessary,” she says. “You won’t get drastically different deals by going to a ton of lenders.”
If your current loan officer issues mortgage applications (some don’t), McRae recommends getting a quote from them — but be prepared to provide a healthy stack of paperwork. “Many people mistakenly believe that the application process is easier if they stay with their loan manager, but in general you will need to provide the same information and documents to your manager as you would with a new lender,” she says. .
Disadvantage: You don’t know how a new lender treats their customers
If you’ve developed a good relationship with your lender, that’s a big deal. “Having someone you trust with your money is invaluable, and your home is probably the biggest investment you have, so you want to make sure you trust the lender you’re working with,” says Todd Sheinin. , COO of Homespire Mortgage in Gaithersburg, Maryland. “Some lenders treat their customers better than others.”
Think about your experience with your current lender. Sheinin recommends looking at questions like, “Have you been kept informed of everything that’s going on with your mortgage?” Do you feel like you got your loan officer’s undivided attention? Did you get a good rate? Has your lender stayed in touch? »
Having a responsive lender is especially important when you need to modify your loan. For example, if you are applying for mortgage forbearance through the CARES Act, communication and transparency from your lender is key to helping you avoid foreclosure.
Advantage: You could get lower closing costs
Closing costs for refinancing typically cost 2% to 5% of your new loan amount – on a $300,000 balance, that’s $6,000 to $15,000, as some lenders charge higher fees for home appraisals, title searches and other services. Therefore, a different lender may offer you lower closing costs than your original lender.
That being said, some lenders “will be willing to give a current, good client a discount on closing costs to keep them as a client,” Sheinin says. Depending on the lender, they might offer a reduction of a few hundred dollars to around $1,000 in lower closing costs.
A word of caution: “I always tell people to be careful when a lender offers ‘credit’ to cover some or all of the closing costs,” McRae says. “It almost always means that a lower interest rate was available.”
Disadvantage: you may be hit with a prepayment penalty
Although prepayment penalties have become less common, some lenders still charge borrowers a fee to pay off their mortgage before the end of their loan term. Prepayment penalty charges can vary widely. Some lenders charge customers a percentage (usually 2% to 3%) of their outstanding principal, while others calculate prepayment charges based on the amount of interest the borrower would pay on their loan for a certain period of time. number of months (usually six months).
Look for the term “prepayment disclosure” in your mortgage agreement to see if your lender charges a prepayment penalty and, if so, how much it costs.
The bottom line
You don’t have to refinance with your original lender, but whether to switch depends on your priorities and the rate and terms you can qualify for with a new lender. Need a little help narrowing down your options? Check out Money’s list of the best mortgage refinance companies
from 2021 .
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