A lot of homeowners ask me which bank has a better mortgage to refinance to.
And I always tell them what type of rates they can expect to obtain in the market at that moment in time, BUT that they should first call up their current lender to see if they would be willing to refinance the loan themselves.
Only in the event of the current lender being unwilling to refinance, or re-price, the existing loan with an attractive new loan package would I tell where the best deals on the market are.
This is because it is almost a given that the closing costs associated with switching to a new lender will outstripped the savings if the loan amount is not large enough.
However, for reasons that I find hard to accept, lenders usually spend more time and resources acquiring new customers rather than keeping existing customers.
The statistical logic is that it cost more to keep old customers than to find new ones.
The study that reveal this is mind-boggling to say the least. It goes against what people intuitively think regarding this issue.
This means that often times when borrowers go to their lenders to request for refinancing, they are often shown the door out of the lender’s books rather than find new doors opened to enter a more exclusive room.
In fact, a lot of times lenders run promotional events to offer breathtaking interest rates for new borrowers. Even to entice borrowers currently with other banks to refinance their loans them instead.
Yet current borrowers will, more often than not, be turned down should they request to convert their existing loans to those on offer.
This is even when there are no penalty fees that the borrower will incur.
Some lenders do practice the mantra of prioritizing current customers as opposed to new ones.
So if your lender does have that corporate culture,the whole process could be over in a jiffy, and you can boast about the money saved at the next social gathering.
Should your lender say yes and you have the option to choose whether to stay or leave, here are some advantages you can look forward to with staying.
Pros of refinancing with current lender
The current lender is the most obvious, but often ignored source of refinancing.
Save time and hassle
The current lender will understandably have your financial and payment record on file.
All the documentation your initially submitted when initially applying for the existing loan is stored in a folder somewhere. All the lender has to do is to access it.
This means that you might not have to submit any new documentation except those for the purpose of updating like your latest computerized pay stub to verify your employment status.
This means stuff like:
- Identification card
- Pay stubs
- Income tax statement
- Loan balance statement
I don’t know about you, but bringing these paperwork in hard copy to the bank can be quite a hassle.
And if you decide to send them via email in soft copy, the job of scanning them can be tedious.
If your payment record is good with the current lender, the whole process of refinancing will be a convenient breeze compared to moving to a new one.
Should your current mortgage contain a conversion option that is still active, the process is all the more simple.
In this case, the borrower would have the right to convert the loan to a new one that is available from the lender at that moment in time.
So let’s say you decide to exercise that option and the lender has a very attractive ARM deal on offer at that point in time. You will then be able to convert it to the new loan with little fuss.
Lower closing costs
Some people challenge the notion that a borrower would incur a much smaller closing cost when they stay with the current lender.
While I believe there must be some instances when this happened for someone to believe that, I would say that it will be cheaper (in terms of closing costs) in general to stay with a lender than to switch to a new one.
If a borrower would incur the same magnitude of closing costs whether they stay with a lender or go to a new one, the chances are that the current lender is trying to pull a fast one or that the new lender is really bending over backwards to acquire the borrower as a customer.
I have witness for myself, homeowners who refinance with their current lenders and only pay a processing fee of $500 or less for a new contract.
And these are large loans we are talking about.
No points, no appraisal fee, no origination fee, etc. Just a flat $500.
I do acknowledge that often in an attempt to entice homeowner to move their mortgages over to them, lender do offer a lot of freebies and subsidies to offset closing costs.
However, unless you were born yesterday, surely you’d know that those costs are added to the interest rate.
With all that said, the greatest barrier keeping lenders from “absorbing” most of the settlement costs is whether the loan has already been sold or if the owner is Fannie Mae or Freddie Mac.
In the latter case, your chances are better.
Cons of refinancing with current lender
I don’t have the data to back me up. But my intuition tells me that there are more homeowners refinancing to a new lender compared to those refinancing with the existing one.
This is for the simple reasons that borrowers are not stupid, and that lenders don’t do enough to retain them.
The reason why lenders are willing to offer teaser rate loans is so that borrowers would sign up for the loans, and for one reason or another stay with it after the period of teasers rates.
After that period, it’s when the real profits are made from the perspective of the lender.
Should a lender find that a borrower is smart enough to jump about the market from lender to lender, they would probably classy these borrowers as undesirable.
However, refinancing is not an entitlement.
There are various reasons why people don’t jump ship even though they are aware of the market.
- Too lazy to go through mortgage application all over again
- Their income is no longer high enough to get a refinancing loan approved
- Interest rates in the market are high than what the borrowers are already on
- New government policies putting restrictions on refinancing
There is really no need for a lender to offer a client a better deal when the loan on the market are no better or when they know that settlement costs on a refinance will render the borrower’s move to another lender fruitless.
It was their strategy in the first place to sucker home buyers in with teaser rates. Then have them pay high interest rates later.
Why stray from their original strategy?
Nevertheless, in such situations lenders are known to be appeasing to borrowers and might compromise just to keep the relationship on a positive note.
For example if a borrower is on a 6% mortgage and the market is at 5%, the lender might make him a courtesy above-market offer of 5.75%.
Depending on the loan size, this 0.25% decrease might be enough savings to appease a customer. Especially when he knows closing costs on a new loan with a new lender can wipe out all the interest rate savings of a measly 1%.
This neat little tactic by lenders can work wonders.
I’ve seen many homeowner willingly accept such minor decreases in interest rate even though they can still save more money by going to a new lender.
This little gesture shows that the lender cares and he borrowers feel heard. And of course, the hassle of home loan shopping can be quite stressful to say the least.
Ultimately, it’s a numbers game to me.
As a pragmatic individual, I’d go with the lender with the best numbers no matter how much the hassle.
They all sell the same product which is money. Why pay more than we have to?