NEW YORK (MainStreet)As mortgage rates drift upward, procrastinating homeowners have good reason to get a move on and refinance before the potential savings shrink to nothing. If you've got a mortgage charging 5.5% or 6%, a refi can still pay, even though you might end up with a 4.5% loan, not the below-4% rate of a while back.
But, gosh, all that shopping around is such a hassle! Would it be easier to just call you current lender and see what it can do for you?
That certainly should be the first step, as the lender you have might offer reduced fees or some other incentive to keep you. But it could work the other way, too, with the lender, assuming you'll stay put in the end, preferring to invest in a new customer.
So in the end you do have to shop around. It's complicated, says Jack Guttentag, emeritus finance professor at the Wharton School.
"A small group of borrowers might profit from refinancing with their current lenders the firms to which they remit their monthly payment," he says on his website, The Mortgage Professor. "Most lenders, however, will do better refinancing with a new lender."
The savings you'd realize by reducing your interest rate in a refi represent a lost income for your lender, even if it issues you a new mortgage. Still, a lender who is losing a lot of customers to competitors may take the initiative to offer you a new loan rather than wait for you to make the first move, Guttentag says. But this deal might not be as good as you could get elsewhere, as the lender wants to "give up as little as possible," he says.
"One way to do that is to base their offer on the borrower's existing rate," he says. "In a 5% market, for example, the borrower with a 7% mortgage might be offered 6%, while an otherwise identical borrower with a 6% mortgage might be offered 5.5%. They can get away with this so long as their existing clients are not shopping other lenders at the same time."
In assuming you're likely to stay anyway, the current lender may skimp in service to you, preferring to put its energies into roping in new clients. As the saying goes, familiarity breeds contempt.
There's another, little-known factor as well: Under federal law, a new lender must refund fees if you decide to call off the deal anytime before three days of closing. This doesn't apply to a deal with a current lender. It's odd, but that's how it is.
In some cases, Guttentag says, the current lender, especially if it had originated the loan rather that having bought it from the originator, will offer a streamlined refinancing, forgoing a credit report, property appraisal and title search. Or the current lender can simply reduce the interest rate on the existing loan, eliminating lots of charges and paperwork.
"Cases where this is possible, however, are few and becoming fewer all the time," Guttentag says. "Most loans today 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."
In other words, yes, find out what deal your current lender will make. But then get out there and see what others have to offer. And if you do come up with something better, ask your lender to beat it.
--Written by Jeff Brown for MainStreet