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The Mortgage Professor: Should You Switch Lenders when Refinancing?

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By Jack Guttentag

banker_couple_refinance(MCT)—A small group of borrowers might profit from refinancing with their current lenders — the firm they pay each month. Most borrowers, however, will do better refinancing with a new lender.

Your existing lender is ambivalent about refinancing you. You are already a client, and your current lender would like to keep it that way. They know that many borrowers who could refinance profitably don’t do it, out of ignorance or lethargy, and they don’t want to put the idea in your head if you might otherwise not get around to it. This attitude suffuses their entire approach to refinancing their own customers.

If your existing lender is losing many clients to other firms, they may take the initiative in soliciting their own customers, offering an attractive rate reduction while giving up as little as possible. One way to do this is to base their offer on the borrower’s existing rate. In a 5 percent market, for example, the borrower with a 7 percent mortgage might be offered 6 percent while an otherwise identical borrower with a 6 percent mortgage might be offered 5.5 percent. They can get away with this so long as their existing clients are not shopping other lenders at the same time.

If you do refinance with your current lender during a refinance boom, you may not get the best service. If your lender has to choose between processing a loan they will likely lose if they don’t get it done quickly, or your loan, which they already own, the choice is all too easy.

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