Thinking about refinancing? If so, you may wonder whether you should keep the same lender.
When you refinance, you pay off your existing mortgage and create a new one. You may even decide to combine both a primary mortgage and a second mortgage into a new loan.
One approach to deciding whether to stay with your current lender or switch lenders is to let them compete for your business.
How do you know what’s the best deal for you?
Determine clearly the reason you want to refinance:
- Is it to lock in low interest rates before they go up? Interest rates in 1963 were around 6 percent. They rose to approximately 18 percent in the early 80s. Now they’re close to 4 percent.
- Is it to build equity in your home more quickly?
- Is it to lower monthly payments for budget reasons? You could lower your monthly payment by extending the length of the mortgage. However, this will also increase the length of time you will make mortgage payments and the total amount that you will end up paying toward interest.
- Is it to pay off the mortgage sooner so that eventually you will have a home that’s paid for with no monthly mortgage payment to worry about? Shorter-term mortgages will have higher payments and generally lower interest rates. Of course, you could shorten your repayment term without refinancing by paying extra on the principal of your existing loan each month.
- Is it to change from an adjustable rate to a fixed rate? With a fixed rate, your monthly payments stay the same – except for adjustments to your escrow amount for changes in taxes and insurance. With an adjustable rate, monthly payments change as interest rates change. On the other hand, variable rates currently are a little lower than fixed rates, saving you some money now.
- Is it to change to an adjustable rate with better terms? Either choice, fixed rate or variable rate, is a bet about future interest rates.
Once you know what you want, approach other lenders to find out what you can qualify for. Be sure to determine all costs of the loan.
It’s not unusual for costs to be as much as 3 percent to 6 percent of the loan amount. A low interest rate can be more than offset by the lender’s upfront charges for points.
Also, ask about fees for appraisals, loan application, land survey attorney, and title search and insurance. It may be worthwhile to accept a higher interest rate for a “no closing cost” loan.
Ask about prepayment penalties. If the loan is variable rate, determine the floor, or minimum, and ceiling, or maximum, rates and how often and how much the rate can change. Sometimes variable rates have ridiculously low “introductory rates” that last only a few months.
After getting some concrete options from other lenders, ask your current lender to match or beat what’s being offered by competitors. Your lender may be willing to do it to keep your business.
Note: If you approach your own lender first, without learning what loans you can obtain from others, your current lender may offer better terms than your present loan – but not the best terms.