If you own a home and have a mortgage, there may come a time when you want to refinance your loan. Refinancing replaces your existing mortgage with a new one, allowing you to adjust things like the repayment term, interest rate, and monthly payment.
If you’ve decided that refinancing is right for you, it’s important to make sure you find the right refinance lender for your needs.
- When you refinance a home loan, you can either go with your original lender or find a new one.
- There are several factors to consider when choosing a refinance lender, such as the cost of refinancing and the level of customer service provided.
- To determine your eligibility and the interest rate you can get, refinance lenders will consider things like your current home equity and your credit score.
What Is a Refinance Lender?
A refinance lender is a financial institution that offers mortgage refinancing. Refinancing means taking out a new mortgage and using the funds to pay off the original one. While some mortgage lenders offer both new mortgages and refinance loans, some lenders focus specifically on refinancing existing loans.
Types of refinance lenders
There are many different types of refinance lenders, including:
- Mortgage bankers. These are individuals or companies that offer home loans, either out of their own funds or from another source. These entities handle the full application, underwriting, and approval processes themselves.
- Credit unions. These smaller, community-owned institutions can often offer better rates and service than larger lenders. However, you must be a member of the credit union to get a loan.
- Direct lenders. Direct lenders are lenders that offer loans to consumers without the use of intermediaries, which can help keep rates low.
- Retail lenders. Retail lenders are one of the most popular types of lenders. They are everyday banks and other companies that work with borrowers to originate loans.
- Online lenders. These include online banks and specialized lenders that operate purely online. They’re good for tech-savvy people who want the lowest price available.
- Correspondent lenders. A correspondent lender originates a loan and immediately sells it on the secondary market. It usually offers quick approval but may have stricter requirements.
- Portfolio lenders. A portfolio lender keeps a loan after it’s originated instead of selling it. That lets portfolio lenders offer more flexible underwriting.
Choosing the Right Refinance Lender
If you’re looking to refinance your mortgage, it’s important to shop around, compare your options, and ask questions to the lender. Mortgages last for 15 or 30 years and refinancing can be expensive, so you don’t want to be stuck with the wrong lender for years to come.
Refinancing with your original lender
One popular option is to refinance your mortgage with the same lender that offered your original loan.
On the one hand, if you’re happy with your current lender, why switch to one that you’re not familiar with? You already know how the underwriting process will go and the customer service experience. That can help the refinance go more quickly. The lender also might offer a discount on closing costs or other fees to help retain you as a customer.
Refinancing with a new lender
Refinancing with a new lender could be a great way to save on your interest rate and closing costs because you can shop around and compare different terms.
There are a few ways to find a new lender to refinance with, including:
- Through a mortgage broker. A mortgage broker can help you shop around with different lenders. However, you may see slightly higher rates or need to pay a fee for this service.
- Through a loan officer. Loan officers work for specific institutions. They can help you learn about different loan options from their institution but won’t help you compare offers from other lenders.
- Through a bank representative. Bank representatives, like loan officers, work for a bank and can help you learn about loan options. However, loan officers also work in the underwriting and approval processes, while bank representatives do not. A loan officer can provide more information about your eligibility.
- Research on your own. There’s nothing stopping you from comparing lenders yourself. However, this can mean a lot more work for you.
Factors To Consider When Choosing a Refinance Lender
You’ll want to shop around and compare refinance lenders to find the best one for your situation.
“When shopping around for the best refinance loan, it’s crucial to not just look at the interest rates, but also the loan terms, fees, and customer service reputation,” says David A. Krebs, a Miami-based mortgage broker. “Use comparison tools and calculators available online and consult with mortgage brokers who can offer professional advice based on your specific needs.”
Cost of refinancing
Cost is the most obvious thing you’ll want to compare when choosing a refinance lender. Many people refinance their mortgage specifically to reduce the cost of their loan.
Some key factors to look at include:
- Interest rate. The interest rate on a loan is one of the biggest determinants of its cost. The rate will influence the monthly payment and the overall cost of the loan.
- Closing costs. Lenders will charge origination fees and other closing costs that you must pay when you refinance. The lower the closing costs, the less money you need upfront and the cheaper the refinance will be. Just keep in mind that lenders offering no-closing-cost refinances often charge higher rates to compensate, so you should look at the total cost of the loan.
- Prepayment penalties. Some lenders will charge a fee if you pay off your original mortgage ahead of schedule. If you want to refinance, you may have to pay this fee.
Customer service and reputation
When you’re comparing refinance lenders, customer service should be a key consideration. After all, you’re trusting your lender to handle a loan secured by your most valuable asset.
If you require help with your loan, think you might miss a payment and need to discuss options, or simply want to speak to someone, it’s ideal to have a lender with a reputation for good customer service. Look into online reviews to make sure any lender you’re considering has good ratings and reasonable customer service hours.
A reliable and responsive lender can also help the refinancing process go more quickly, which is important if you’re trying to refinance to save money.
What Is a Loan Estimate?
A loan estimate is a document that lenders will provide when you apply for a mortgage or refinance. This document is required by law, and every lender uses the same one. That makes it very useful for comparing loan offers from different lenders.
A loan estimate outlines the details of the loan you could receive, including:
- Your name and address.
- The loan originator.
- The initial loan balance.
- The loan type.
- The loan term.
- The initial interest rate.
- The annual percentage rate, or APR.
- How much interest you’ll pay in total.
- The initial monthly amount owed.
- The length of the rate lock period.
- Whether the rate is fixed or adjustable.
- Whether the loan balance can increase.
- Whether the monthly amount owed can increase.
- If there’s a prepayment penalty.
- If there’s a balloon payment.
- Estimated closing costs.
- Discount points.
In other words, the loan estimate includes the costs that you’ll pay either upfront or over the life of the loan. If you apply for multiple loans, you can compare offers to get a sense of the full cost of each loan.
What Will a Lender Consider Before You Refinance?
Remember, when you refinance, you’re applying for a brand-new loan and using that money to pay off your old mortgage. That means the lender will want to check your financial situation to make sure you’re a creditworthy borrower.
Your lender will examine some details, including:
- Your current home equity. Lenders want to make sure you have some equity in the home. The more you have, the less risky you are as a borrower. Refinancing with little or no equity may be difficult.
- How long you’ve owned the home. If you’ve lived in your home for a while and kept up with mortgage payments, you can appear more stable to lenders, easing the process.
- Your credit score. The higher your credit score, the easier it will be to get a loan and the lower the interest rate will likely be. A score of 620 is a common minimum, but 750 or higher is ideal for getting the best rates.
- Your debt-to-income ratio. Lenders want to ensure you have sufficient income to pay your debts. Most look for a maximum DTI ratio of 43% or so.
- Documentation. Lenders will ask for things like pay stubs, bank statements, and other financial documents to corroborate any information you provide about your financial situation.
FAQ: Choosing the Right Refinance Lender
Here are answers to frequently asked questions about choosing the right mortgage refinance lender.
When refinancing, it’s important to compare loan options, but there’s no magic number for how many lenders you should compare. The more lenders you consider, the better your chances of finding a great deal — but also consider the time investment. Try to look at a minimum of three options.
There’s no limit to how often you can refinance a home, but realistically, you should try to avoid doing it repeatedly. Each time you refinance, you’ll have to pay closing costs, and applying for a new loan can ding your credit score. Expect to wait a minimum of six months before refinancing again will make sense.
There are pros and cons to both strategies, so one isn’t necessarily better than the other. Looking into different lenders may help you find a better deal, but your current lender is an entity you’re already familiar with that could offer quicker approval and may give you a discount on closing costs.
The Bottom Line on Choosing the Right Refinance Lender
Choosing the right lender when refinancing your mortgage is key. You’ll want to make sure you find a low-cost mortgage from a lender that offers strong customer service. Take the time to shop around and compare multiple lenders to find the best deal.