Regardless of your reason for refinancing, to save money, to get cash or both, you should contact several mortgage lenders. Remember, you do not have to refinance your mortgage with the same lender that provided your original mortgage. However, to keep your business, some lenders will offer their original mortgage customers the incentive of lower mortgage interest rates, sometimes with reduced closing costs.
Start with your current mortgage lender and then contact several more to compare mortgage types, rates and terms.
The types of mortgage lenders include:
- mortgage bankers
- commercial banks
- credit unions
- thrift institutions (savings banks and savings and loan associations)
Banks, savings and loans and credit unions gather funds from their customers through checking and savings accounts and certificates of deposits. These funds are then used to make loans. When these institutions make a mortgage loan, they may decide to hold it in portfolio or sell it to secondary market investors.
Mortgage bankers get their funds typically by selling their loans in the secondary mortgage market. Although the loan is sold shortly after funding, mortgage bankers may not sell the servicing on the loan. Since mortgage bankers primarily have one focus of business-to make mortgage loans-they usually offer very attractive loan programs and rates.
Many entities, including banks, credit unions, savings and loans, insurance companies and mortgage bankers make home loans. Lenders and terms change frequently as new companies appear; old ones merge and market conditions fluctuate. To get the best deal, it’s a good idea to compare loans and fees with at least a half a dozen lenders. Because many types of home loans are standardized to comply with rules established by the Federal National Mortgage Association (Fannie Mae) and other quasi-governmental corporations that purchase loans from lenders, comparison shopping is not difficult. Be sure to ask for the same size, type and length of mortgage-such as a 30-year fixed term mortgage for $300,000-so you are comparing apples to apples.
Lenders will likely vary in their costs and fees. For example, you may be able to get a 6.75% mortgage with 1 point or a 7% mortgage with 0 points. (A point is equal to 1% of the loan amount.) A lower interest rate with higher points means a lower monthly payment but higher upfront costs. If you want to keep the upfront costs down, and can handle a larger monthly payment, you may want to look for a slightly higher interest rate with fewer points. Many lenders will allow you to finance your points and customary closing costs, which means that some of the costs of refinancing can be included in the loan amount. This is sometimes called a “no-cost refinance.”
Mortgage lenders vs Mortgage Brokers
It is important to understand the difference between mortgage lenders and mortgage brokers. As a rule, mortgage brokers don’t make a decision whether to extend you a loan, and they don’t actually make the loan. They work as intermediaries between borrowers and lending sources. However, this fact does not mean that you are paying a higher rate.
Since mortgage brokers obtain their funds from a variety of sources, they can even save you money by shopping your loan
Mortgage brokers generate about 50% of all loans. They have access to a variety of lenders and often offer the most choice in loan programs. Brokers assist the consumer in completing the application and loan selection process and direct them to suitable lenders to fund the mortgage. Besides, brokers can quickly place your loan with another lender if your loan is turned down. Mortgage brokers are paid a fee by the borrower or the lender when a loan closes.
If you have special financing needs or want to shop the market for the best deal, an experienced broker may be able to find the best loan for you.
Benefits of mortgage brokers
Benefits of working with a mortgage broker include:
- Variety. By shopping across a range of different programs and lenders, a mortgage broker may find you a better fit than you could find on your own.
- Qualifying. A mortgage broker can best steer you to the national or regional lenders that are most likely to accept your application based on your financial and personal information.
- Savings. You may get a more favorable loan rate.
- Speed. A broker saves your time shopping for a loan.
Are You Dealing with a Lender or a Broker?
It is not always clear. Generally, mortgage brokers don’t use the word ‘broker’ in their company name. If you are not sure, don’t hesitate to ask your mortgage company if they act as a lender or as a broker. Many financial institutions currently operate as both lenders and brokers. For example, on some loans a mortgage company may act as a lender, on other loans-as a broker, or they may act as a lender in their home state and broker loans in some other states.
Regardless of what type of institution you do business with, it’s important to make certain it has no complaints registered with state or federal regulators or the Better Business Bureau. You may also want to verify how long your bank or mortgage company has been in business.