Refinancing your mortgage loan is a perfect way to reduce your current mortgage rate and save money each month. A refinanced mortgage creates a new home loan with new terms. You can extend the length of your mortgage, reduce the length of your mortgage or apply for a different type of loan. There is no rule that says you have to refinance with your current lender. In fact, many homeowners refinance with a different mortgage company. Sometimes it's smart to go with your current lender; at other times you'll do better with a new one.
Better Mortgage Rate
A low interest rate mortgage environment has prevailed from the end of the Great Recession in 2010 until mid-2018, when they began to rise, although they're still below historical rates. Homeowners with 30-year mortgages taken out when interest rates were higher have found they can refinance these loans and save substantial amounts of money.
If you're in that situation, you may be wondering if you should stick with your current mortgage provider or refinance through a new one. There's no clear evidence that doing one is better than the other. However, Yogi Berra, the great New York Yankees catcher famously advised, "When you come to a fork in the road, take it." In that spirit, why not contact your current lender to see what terms they can give you on a refi and at the same time contact several other lenders as well?
One thing that many borrowers find is that most lenders have some flexibility over interest rates and closing costs. To save a loan prospect from going elsewhere they will often make favorable adjustments. If a new lender offers you a better rate than your current lender, check back with your current lender to see if they can beat it. It's always worth a try.
Takes Less Time
One thing that's usually in your current lender's favor is that you're already known to them; they have your records on file and can often use that information to determine the terms of the refi a little faster than another lender. Before the internet age, this was a substantial advantage. In the 21st century, when any lender can pull your complete credit history in a few minutes, it's probably less so.
Avoid Prepayment Penalty
Another consideration is the presence or absence of a prepayment penalty on your current loan. In the 1980s these penalties were fairly common; they're less so today and, hopefully, your current loan doesn't have one. Before going further into investigating the loan terms you can get from other lenders, you might want to consult your current loan documents to see, first, if there is such a penalty, and then if there is, the penalty terms. Some lenders guard against very early payoffs, but only penalize the borrower for a payoff in the first five years or so of the loan. Other payoff penalties are in force for the full term of the loan.
Typical penalty amounts may be some or all of the interest due on the loan over a six-month period. If you have a loan with an average monthly interest amount that's still substantial because you're in the early years of a long-term loan, you could be facing a prepayment penalty of thousands of dollars. Usually these penalties do not apply to refis with the same mortgager (but check your loan docs!), if your loan carries the penalty your refi choices may be limited to your current lender.
One possible escape route: some states have laws limiting or eliminating the mortgage penalty. As of 2008, Alabama, Arkansas, Iowa, Maryland, New Mexico and Vermont don't allow them at all, even if you agreed to the prepayment penalty in the mortgage contract. Other states put limits on penalty amounts or don't allow them on higher interest loans. Google "[your state] mortgage loan prepayment penalty laws" to find out the law in your state.
Federal laws also apply to all prepayment penalties on loans made after 2013, outlawing the prepayment after the loan has been in force for three years and limiting the amount that can be charged. Details of these federal restrictions are available in the References.
Fewer Closing Costs
Borrowers frequently focus on the nominal loan rate, often the first rate the lender offers. A better way of finding out the real cost of your loan is to determine the APR rate, which includes both the nominal interest rate and the interest rate effect of other costs, including brokers fees and most closing costs. You have a legal right to the APR rate; ask and your lender will tell you. The cost difference can be substantial. For example, broker's fees often run 1 percent of the loan amount. If you're taking out a $300,000 refi with a 15-year term, the total cost of the loan, principal and interest, without the fee is $413,096; with the fee it's $417,227.
Comparing APR rates allows you to determine which lender's offer, your current lender or a new lender, is really better.
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