Refinancing your mortgage can help you get a lower interest rate and a cheaper monthly payment. This can add more cash flow to your budget, and with extra cash, you can pay off debt, increase your emergency fund, and maybe enjoy a little fun with your money. You might also have the option of a cash-out refinancing, where you can tap some of your home’s equity and use this money for home improvement projects, debt consolidation, etc.
What's a Mortgage Refinance?
Refinancing means paying off one mortgage loan with a new mortgage loan. You’re essentially repeating the original loan process. However, the new mortgage comes with a new term, and in most cases, a more desirable interest rate.
A good credit history is one of the qualifications for refinancing. As a suitable candidate, some mortgage lenders will gun for your business. So don’t be surprised if you receive offers in the mail or calls from mortgage lenders advertising their rates and fees.
Since refinancing creates an entirely new mortgage, you’re under no obligation to refinance with your existing lender. This is good news if your present lender has made the mortgage experience anything but pleasurable, and you want nothing more than to take your business elsewhere. On the other hand, if you’re satisfied with your lender, you may wonder whether there’s an advantage to sticking around and using this bank for your new mortgage.
Some people automatically think that the reward for showing their loyalty to an existing lender will be a more streamlined process, or they assume they won’t have to show as much documentation. But this isn’t the case.
The guidelines for qualifying for a mortgage have tightened over the past several years. Today, mortgage lenders don't take any chances. Mortgage underwriters carefully scrutinize every single application to make sure applicants are capable of managing the monthly payments.
It doesn’t matter whether you’re working with the same bank or a different one, you’ll have to complete the same paperwork and provide the same documentation. This includes producing your most recent paycheck stubs, tax returns from the past two years, bank account statements and information on other assets. So don’t think an excellent credit score, a perfect payment history, or the fact that you already have a mortgage solidifies an approval. This is a new mortgage and lenders need as much information as possible to determine whether you’re eligible.
Why Refinance With the Same Lender?
This isn't to say refinancing with an existing lender doesn't have its advantages. Mortgage lending is a competitive business. Just about every bank and credit union offers a slew of mortgage products, plus banks have to compete with private lenders.
Does your mortgage lender want to retain your business? Absolutely! This is especially the case if you’re a responsible borrower. Lenders know you have options, and they know you can take your business elsewhere. So if the bank learns you’re shopping around, it might offer a few incentives.
There’s nothing cheap about refinancing a mortgage. You don't have to stress about a down payment, but you will have to pay closing costs. These are fees paid to the lender for processing the loan. Closing costs include a variety of fees, such as the loan origination fee, an appraisal fee, attorney fees, title search fees, recording fees, etc. On average, closing costs run between 2% and 5% of the mortgage, which means you can spend $4,000 refinancing a $200,000 mortgage — and that’s on the low end.
This fee alone might be enough to make you change your mind about refinancing. But if you refinance with your same lender, the bank might waive or reduce some of the closing costs. That's less money you’ll have to spend out-of-pocket. This is a pretty sweet incentive, especially when you are cash-strapped and counting on a refinancing to lower your interest rate and monthly payment.
Your lender might also dangle an attractive rate in your face in order to keep your business. But you should keep in mind that mortgage rates vary from bank to bank. As you discuss refinance options with your current bank, the loan officer might offer a rate just low enough to grab your attention. At this point, you might be happy with any rate that’s lower than what you’re currently paying. Just know that the rate your bank quotes might not be the best you can do.
So although you have an excellent relationship and a long history with your current mortgage lender, it doesn't hurt to shop around and see what other banks and private lenders can offer.