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The Mortgage Professor: Should You Switch Lenders when Refinancing?

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By Jack Guttentag

What’s more, you have no right to rescind a loan from your existing lender. Borrowers who refinance with a lender other than their existing lender have the right to rescind the transaction within three days of closing, with the lender obliged to reimburse them for all payments made. This can be valuable protection for borrowers who realize they have made a mistake or suspect that the lender has abused them in some way.

It is ironic that Congress thought that borrowers needed this extra protection when dealing with new lenders, when in fact they need it more when dealing with their current lender. But that is the way it is. I will be discussing the right of rescission in a future article.

There are cases in which refinancing with the existing lender may pay. If your current lender had originated your loan, still owns it and would continue to own it after a refinance, it can refinance you with minimal settlement costs. The lender may forgo a credit report, property appraisal, title search and other risk-control procedures that are otherwise mandatory on new loans. This is strictly up to the lender.

Indeed, if you are looking only to reduce the interest rate, and not to take any cash out of the transaction, and if your payment record has been good, the lender may elect simply to reduce the interest rate on your current loan rather than refinance it. This replaces all settlement costs with a small fee for amending the contract.

Cases where this is possible, however, are few and becoming fewer all the time. Most loans today are sold by the originating lender, and even when the loan 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.

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