Pros and Cons of Switching Lenders When You Refinance Your Mortgage

If you’re thinking about refinancing your home loan, consider switching to a new mortgage lender.

“Lender loyalty can backfire if you don’t shop around to see if there’s a better rate,” says Heather McRae, senior loan officer at Chicago Financial Services. That’s especially true in today’s refi market, where lenders are aggressively competing to woo customers.

According to a Black Knight reports, lender retention is at an all-time low. Mortgage servicers (read: the company that collects your mortgage payments) held just 18% of the estimated 2.8 million homeowners who refinanced in the fourth quarter of 2020, the lowest portion on record.

Here are the pros and cons of changing lenders when you refinance your mortgage.

Pro: You can get a better mortgage rate

It never hurts to shop around, says Dave Mele, president of Homes.com. “Many borrowers stay with a lender when refinancing because they’re used to them, but you always 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 loan terms.”

However, you don’t need to talk to every lender in town. McRae recommends getting quotes from three lenders when surveying your options. “I talked with [a refinancer] recently spoke to 11 different mortgage lenders and it doesn’t take much,” he said. “You’re not going to get dramatically different deals by going to multiple lenders.”

If your loan servicer currently issues a mortgage refi (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 the loan provider, but in general you should provide the same information and documentation to your servicer that you would to a new lender,” he said. .

Con: You do not know how a new lender treats its customers

If you’ve developed a good relationship with your lender, that’s no small feat. “Having someone you trust with your money is priceless, and your home is probably the biggest investment you have, so you want to make sure you have confidence in the lenders you work with,” said Todd Sheinin, chief operating officer at Homespire Mortgage in Gaithersburg, Maryland. “Some lenders treat their clients better than others.”

Imagine your experience with your lender today. Sheinin suggests considering questions like: “Are you staying informed about everything that’s happening with your mortgage? Do you feel like you have the full attention of your loan officer? Are you getting great rates? Are your lenders staying connected?”

Having a responsive lender is essential when you need to modify your loan. For example, if you apply for mortgage forbearance through the CARES Act, communication and transparency from your lender is essential to help you avoid foreclosure.

Pro: You may 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 current clients and good discounts on closing costs to keep them as clients,” says Sheinin. Depending on the lender, they may offer a reduction of several hundred dollars up to $1,000 in lower closing costs.

One caveat: “I always tell people to be careful when lenders offer ‘credits’ to cover some or all of the closing costs,” McRae says. “That almost always means a lower interest rate is available.”

Con: You may be slapped with a prepayment penalty

Although prepayment penalties have become less common, some lenders still charge borrowers a fee to pay their mortgage off before their loan term ends. Prepayment penalty fees can vary widely. Some lenders charge customers a percentage (usually 2% to 3%) of the outstanding principal, while others calculate the prepayment fee based on how much interest the borrower will pay on the loan over a 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.

Bottom line

You don’t have to refinance with your original lender, but whether it makes sense to switch to another depends on your priorities as well as the rate and terms you can match with the new lender. Need a little help whittling down your options? Check out the Money list The best mortgage refinance company from 2021.

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