Recently, you hopped online to make your mortgage payment. On the front page of your financial institution’s website, you saw refinancing advertised at a much lower interest rate than the one you currently carry.
Your gut instinct may be to fill out an application for a refi. Who doesn’t want a lower interest rate on their mortgage?
But before you jump at the offer to refinance with your current lender, you should shop around. There may be better deals out there.
Pros And Cons Of Refinancing A Mortgage With Your Current Lender
- They have all of your personal information on hand, which may help the approval process go marginally faster.
- You may be able to use your continued patronage as a bargaining chip for lowering closing costs and other fees.
- If you like your current financial institution, there’s nothing wrong with staying with them out of brand loyalty — as long as it’s not costing you money.
- You will still have to provide documentation such as bank statements and W-2s, and your lender will still have to pull your credit report.
- They may not have the best rates on the market. You’ll need to shop around to find out.
- They may have more or higher fees than their competitors.
- If you’re a customer service nightmare, your current institution may offer you higher rates
How to shop for a refi loan
That advertised rate you saw may not be the best option on the market. Even if it is, there’s no guarantee you’ll qualify for it.
Step 1: Compare rates from multiple lenders
Before you fall in love with the benefits of refinancing with your current lender, check to see what you can find elsewhere. A great way to do this is to use a site like LendingTree, which is MagnifyMoney’s parent company and one of the biggest online marketplaces for loans.
Without performing a hard credit pull (which saves you from dinging your score), LendingTree will ask you some basic underwriting questions via an online form. They can then match you with potential lenders who participate in its marketplace. The lenders will contact you via email or phone with quotes, which you can compare.
Of course, you can always work directly with lenders in your area as well.
Armed with this information, you can go back to your current lender to see if they can meet or beat the lowest rate you’ve been offered.
Step 2: Get all quotes the same day
“It is important to get all the quotes at the same time on the same day,” says Casey Fleming, mortgage adviser and author of "The Loan Guide: How to Get the Best Possible Mortgage," “because at that moment, everyone is looking at the same data, and their wholesale cost for that loan is identical.”
That’s because of the way mortgage lenders set their rates. When you take out a mortgage, your financial institution actually owns it for a very short period of time. But not for long. Eventually, they will bundle your loan together with a bunch of other loans and sell it to investors, and they continue to service your loan for a small fee.
They offer standard, wholesale interest rates to investors daily. Your financial institution needs to charge you more than that wholesale interest rate if they want to make a profit on the sale. You should apply to all financial institutions on the same day to ensure they’re all basing your quotes off of the same wholesale rate.
Step 3: Go to your lender to negotiate
When you find the best offer, use it as leverage with another lender. If they’re eager for your business, they may be willing to outdo their competitor. Remember that you’re not just negotiating interest rates but also origination fees, closing costs and appraisal report costs.
After you are offered a quote you are happy with, the lender locks it for a specified period of time before it is rescinded. Better rates merit shorter lock periods, the shortest being 15 days.
What if I find a better deal and they won’t match it?
If your current lender won’t match the outside quote, it likely makes sense to go with the outside lender. You’ll have a limited window in which to lock in your new refi rate, called a rate lock period. Be sure you know how long your rate lock period lasts so you can decide before you lose your rate.
A great rate isn’t all you should look at when comparing the costs of remaining with your lender versus choosing a new lender. Ask about origination fees, balloon payments and prepayment penalties — all of which could potentially make it more expensive to refinance.
After you have applied for the loan, you will be issued a Loan Estimate form, which outlines the proposed terms. At this point, a home appraisal will be performed to determine the value of your home.
Once final approval is issued, you will receive a Closing Disclosure form, which will tell you exactly how much you will need for closing costs. At this point you are still able to walk away from the table. After three days have passed, you’re finally allowed to sign the documentation agreeing to the loan.
How do I know it’s time to refinance my mortgage?
Whether you decide to refinance with your current lender or not, before taking the plunge you want to figure out if doing so will actually save you money.
Fleming says, to make a fair judgment, you need to look at interest and other costs over the same holding period.
“Very few people hold their mortgage until it's paid off,” he explains. “Comparing the two for a period longer than [a few years] makes no sense, since your savings on the proposed loan will stop once you sell the house or refinance.”
For example, let’s say you currently have a mortgage with a balance of $284,020 with a 5% interest rate. You are considering refinancing to a 4% interest rate. In order to refinance you’d have to pay $4,100 in fees, including closing costs and origination fees.
Let’s look at how each of these options would pan out over an 84-month holding period:
Your current mortgage
Fees and closing costs: N/A
Fees and closing costs: $4,100
Total interest charges over 7 years: $92,385
Total interest charges over 7 years: $77,207
Total savings: $15,178
The refinance will, indeed, save you money even with the closing costs and fees. It’s time to refinance.
How to negotiate a refinance with your current lender
Like we mentioned before, when financial institutions issue a mortgage or refinance, they don’t typically keep it. They usually sell it off, and then continue servicing your loan for a kickback from the buyer. And they know that in order to keep getting paid that servicing fee, they’ll have to keep servicing your loan. That gives you a bit of leverage.
If you have other offers on the table, your current lender may be willing to meet or beat them.
“Call [your lender], and one of your options will be to speak with a loan officer, or mortgage adviser, or mortgage planner,” says Fleming. He notes that all of these titles are indicative of the same job description. “Tell them that you believe you can get a better rate, and that you have begun shopping and wanted to give them a shot at keeping you as a customer.”
This will only work if you can actually get a better rate elsewhere. While you can refinance with your current lender, the lender will be able to tell if you’re bluffing as they’ll have to pull your credit report and look at recent bank statements and W-2s.
“If [you] love the service of [your] existing lender, by all means ask them for a quote,” says Fleming, “but the market is very competitive today so shopping will almost certainly save you money.”
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