Should you refinance with your current lender

The case for refinancing with your current lender is that this lender may be in a position to waive some settlement costs because you are an existing customer. The case against is that that lender may offer a deal that is better than the one you have but inferior to one you might obtain elsewhere. Hence, I recommend shopping other lenders first, and your current lender last.

In a refinance market, lenders are conflicted with regard to how they treat their existing borrowers. They don't want to encourage any of their borrowers to refinance who might otherwise not get around to it. On the other hand, if they know that a borrower is going to refinance regardless, they want the new loan. To get it, many lenders have what are called "retention" programs, which are designed to recapture as many as possible of those borrowers who are determined to refinance, without putting any refinance ideas into the heads of other borrowers. Distinguishing the two groups is not easy, but there are ways.

For example, if you call your lender to find out the exact balance of your loan and your lender has a retention program, you will quickly receive a call from its loan origination department offering to refinance your loan. A balance inquiry usually means the borrower is looking to refinance.

The lender to whom you are now remitting your payments may be in a position to offer you lower settlement costs than a new lender, but this can vary from case to case. The greatest potential for lower settlement costs arises where the current lender was the originating lender and still owns your loan, a common situation with loans made by banks and savings and loan associations. If your payment record has been good, 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 not looking to take any cash out of the transaction and are looking only to reduce the interest rate, the lender may elect simply to reduce the interest rate on your current loan rather than refinance. This avoids all settlement costs.

If the lender to whom you are now remitting your payments is the originating lender but no longer owns the loan, the potential for lower settlement costs is less. In this case, your lender does not have the same discretion to forego settlement procedures but must follow the guidelines laid down by the owner of the loan. If the loan had earlier been sold to one of the federal secondary market agencies, Fannie Mae or Freddie Mac, the guidelines are theirs. While both agencies have provisions for "streamlined refinancing documentation," the discretion granted the lender, and therefore the potential cost savings, is quite limited.

The potential for lower settlement costs is least when the lender to whom you are now remitting your payments is neither the originating lender or the current owner. This is a fairly common situation that arises when the contract to service the loan is sold. In this case, your lender may not be in a position to use all of the streamlined refinancing procedures because its files do not contain some of the information those procedures require, such as the original appraisal report.

The greater the potential for lower settlement costs from dealing with your present lender, the more likely that that lender can offer you the best terms. Which doesn't necessarily mean that he will. The reason for going to your present lender last is to make sure that you receive the benefit of any cost reductions.

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