A small group of borrowers might profit from refinancing with their current lenders — the firm they pay each month. Most borrowers, however, will do better refinancing with a new lender.
Your existing lender is ambivalent about refinancing you. You are already a client, and your current lender would like to keep it that way. It knows that many borrowers who could refinance profitably don’t do it, out of ignorance or lethargy, and it doesn’t want to put the idea in your head if you might otherwise not get around to it. This attitude suffuses lenders’ entire approach to refinancing their own customers.
If your lender is losing many clients to other firms, it might take the initiative in soliciting its own customers, offering an attractive rate reduction while giving up as little as possible. One way to do this is to base the lender’s offer on the borrower’s existing rate. In a 5 percent market, for example, the borrower with a 7 percent mortgage might be offered 6 percent, while an otherwise identical borrower with a 6 percent mortgage might be offered 5.5 percent. Lenders can get away with this so long as their clients are not shopping other lenders at the same time.
If you refinance with your current lender during a refinance boom, you might not get the best service. If your lender has to choose between processing a loan it is likely to lose if it doesn’t get it done quickly or your loan, which it already owns, the choice is all too easy.
What’s more, you have no right to rescind a loan from your existing lender. Borrowers who refinance with a lender other than their existing lender have the right to rescind the transaction within three days of closing, with the lender obliged to reimburse them for all payments made. This can be valuable protection for borrowers who realize they have made a mistake or suspect that the lender has abused them in some way.
It is ironic that Congress thought that borrowers needed this extra protection when dealing with new lenders, when, in fact, they need it more when dealing with their current lender. But that is the way it is.
There are cases in which refinancing with the existing lender may pay. If your current lender had originated your loan, still owns it and would continue to own it after a refinance, it can refinance you with minimal settlement costs. The lender may forgo a credit report, property appraisal, title search and other risk-control procedures that are otherwise mandatory on new loans. This is strictly up to the lender.
Indeed, if you are looking only to reduce the interest rate and not to take any cash out of the transaction, and if your payment record has been good, the lender might elect simply to reduce the interest rate on your current loan rather than refinance it. This replaces all settlement costs with a small fee for amending the contract.
Cases where this is possible, however, are few and becoming fewer. Most loans are sold by the originating lender, and even when the loans are retained, the servicing rights may be sold. Lenders servicing for others do not have the same discretion to forgo settlement procedures but must follow the guidelines laid down by the owner of the loan.
If the loan had been sold to one of the federal secondary market agencies, Fannie Mae or Freddie Mac, the guidelines are theirs. Although both agencies have provisions for “streamlined refinancing documentation,” the discretion granted the lender, and therefore the potential for cost savings, is quite limited.
The fact that your current lender would have lower settlement costs than a new lender does not necessarily mean that you will receive the benefit in your mortgage price. If your current lender believes that you will accept any rate that is below your current rate, it is very unlikely that you will receive the best possible deal.
The best argument for ignoring your current lender is that you can take advantage of Internet-based shopping at sites offering competing lenders, many of which might not have existed when you took out your current mortgage.
I don’t mean to suggest that Internet-based shopping is a walk in the park — it has its challenges, and yes, it has its hazards as well. But help is available, which is not usually the case when dealing with your current lender.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania whose column is distributed by McClatchy-Tribune. He can be reached at www.mtgprofessor.com.