How to Pick the Right Lender When Refinancing a Mortgage

How do you pick the right lender when you've decided to refinance your home? After all, you've crunched the numbers and they indicate that refinancing would be a plus in your case—you'd have lower monthly payments, pay less in interest over the long term, or perhaps pay just a little more to cut more than a decade off the length of your loan. Now you just need to get that new mortgage.

To get your loan, of course, you need to find a lender. While walking into your local bank and asking for a loan may help you reach your goals, putting a little more effort into finding the right lender is likely to be time well spent as it can get you money.

Finding the Right Lender

Banks and credit unions are the two entities that most often come to mind when homeowners think about obtaining financing, but these are not the only potential sources of a loan. Consumer finance companies, savings and loan institutions, and other specialized lending firms also offer mortgages. Taking the time to choose the right lender can make a big difference in the amount of money you will spend in fees to obtain a loan as well as in mortgage interest over the lifetime of the loan.

Loan Officers and Mortgage Brokers

When beginning your search for a lender, keep in mind that loan officers—who represent the banks, credit unions, and other financial institutions that they work for—are paid partly based on the transaction that you make. That does not necessarily make loan officers bad people; it just means that you should do a little work on your own to make sure you get the best deal. It is thus important to understand the full variety of available options and the pros and cons of each.

Mortgage brokers do not work for lenders but, instead, serve as an intermediary between you and the lender and can help you compare the services of many lenders and work to secure you the best rate. They are sometimes paid a fee by the borrower (that’s you) to provide assistance with finding a mortgage and facilitating the loan origination process, but more typically they are paid by the lender in exchange for bringing business to that lender.

Like loan officers, making a sale is how they get paid. Here again, a little knowledge and some comparison shopping are likely to serve you well. And as with many traditional financial services, there are now several online tools available to help you avoid broker fees.

Mortgage Lenders Comparison: Cost

The key items to consider when selecting a mortgage lender are costs and services. Understanding the terms of your loan—the amount of the monthly payment, the number of years until it’s paid off, the interest rate, fees, and whether or not a penalty is accessed if you pay off the loan early—will provide insight into the various costs. Conversations with your prospective lender or mortgage broker, and a review of the good faith estimate (GFE) the lender provides, will enable you to make a reasonable comparison.

The good faith estimate is a legally mandated document designed to protect borrowers by requiring lenders to provide standardized disclosure of the costs associated with a loan. This written estimate details the fees you will be required to pay at closing, including the cost for all points, processing, legal fees, and filing and closing fees.

While the law does not dictate the price that each lender charges for the various services it offers, the good faith estimate does provide a useful tool for comparison shopping. One loan provider may charge more for legal fees and less for filing fees. Another may have lower overall fees but charge a higher interest rate. Using a mortgage calculator is a good resource to budget these costs.

A careful review of good faith estimates from the lenders you are considering will help you find the best deal.

Mortgage Lenders Comparison: Service

On the service side, getting your questions answered in a timely and accurate way is an important element of the process. Getting a loan requires quite a bit of paperwork, as well as the collection and dissemination of a significant amount of personal information. Having a single, reliable point of contact for your questions can make the difference between a smooth, easy process and a tough experience.

Having the loan ready in time for your closing is another important consideration. Final documentation is often unavailable until days—or even hours—before the closing, and coordinating the schedules of the various parties involved in the transaction can be a challenge. A dependable lender will help to keep everything on track and on time and make a significant contribution to your personal peace of mind.

At one time, researching and gathering the information you needed to refinance was a time-consuming process requiring visits to multiple lenders or hours on the telephone. While those traditional options are still available, technology has helped to make the process much easier. You can go online and find convenient ways to compare lenders and gain insights into the range of interest rates available for the loan you’re seeking.

The Bottom Line

Refinancing your mortgage can, under the right circumstances, be a financial boon for adding extra savings to your wallet. Before you embark on the process, though, you need to thoroughly understand refinancing in order to make sure that it’s right for your particular situation.

These steps involve deciding whether to use a loan officer or mortgage broker, selecting a lender, calculating costs, and determining who will provide the best service. Fortunately, online resources make the job much easier today than it used to be. So take control of the process and see what you might be able to save.