The problem is that you are trying to refinance with the lender who has your existing loan. All lenders are under
pressure trying to process the unprecedented volume of refinances. They have to set priorities. Yours is low because your
lender already has your loan.
I have written before about the hazards of refinancing with your current lender, but the hazard you raise has only recently
appeared in my mailbox. It has impelled me to set down in a more organized way the pros and cons of refinancing with your
current lender.
The Pros
Perhaps the major reason people approach their current lender is that it is convenient. They are spared having to decide
who and where to shop. If their payment record has been good, furthermore, their existing lender has immediate access to their
record, where other lenders would have to investigate. There is comfort in "being known", and a belief that this should earn
them special treatment.
There is some validity to this belief. The current lender – defined as the firm to which you now remit your payments -- may
be in a position to offer lower settlement costs than a new lender. How much lower, however, can vary from case to case.
The greatest potential for lower settlement costs arises where the current lender was the originating lender and still owns
the loan, a common situation with loans made by banks and savings and loan associations. If the payment record has been good,
the current 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.
If the current lender was the original lender but later sold the loan and is now servicing it for the owner, the potential
for lower settlement costs is less. A lender servicing for others must follow the guidelines set down by the owner. If the
owner is one of the Federal secondary market agencies, Fannie Mae or Freddie Mac, the guidelines are theirs. While both
agencies have provisions for "streamlined refinancing documentation", the discretion granted the lender, and therefore the
potential cost savings, is quite limited.
The potential for lower settlement costs is least when the current lender was not the originating lender and is not the
current owner. This is a fairly common situation that arises when the contract to service the loan is sold. In this case, the
lender may not be in a position to use all of the streamlined refinancing procedures because its files do not contain some of
the information those procedures require, such as the original appraisal report.
The Cons
The major argument against refinancing with your current lender is that that lender may not give you the market price. It
will try to minimize its loss by taking advantage of your preference for staying put, and your reluctance to shop the market.
Any settlement cost benefits your current lender can offer that other lenders cannot may serve to draw attention away from the
fact that the rate and points offered are not competitive
Above-market offers are especially likely if the lender takes the initiative in soliciting its own customers. Lenders who
do that are likely to base their offer on the borrower's existing rate. For example, in a 5% market, the borrower with a 7%
mortgage might be offered 6% while a borrower with a 6% mortgage (but who is otherwise identical) might be offered 5.5%. The
objective is to provide a saving over the existing loan that is attractive enough to discourage the borrower from looking
elsewhere. This way, the lender gives up as little as possible.
The unfortunate borrower who wrote the letter above points up an even greater hazard: the borrower dealing with his current
lender may get the run-around because that lender has no interest in completing the deal. Why rush to convert a 7% loan into a
5.5% loan? Charging a lock fee and then letting the borrower dangle is particularly vicious.
The Preferred Strategy
I advise borrowers to 1. Find out the settlement cost savings their existing lender can offer them; 2. Find their market
price by shopping elsewhere; 3. Shop their existing lender last.
