Should you refinance your mortgage with your current lender?

Not always. Research suggests that you should shop around instead.

There is a frustratingly wide range of opinions on whether you should refinance with your current lender. Here are just two of the many reputable sources providing contradictory suggestions:

  • The Fed Board says you should start by asking your current lender for a mortgage refinance. “That lender may want to keep your business, and may be willing to reduce or eliminate some of the typical refinancing fees.”
  • The Mortgage Professor, on the other hand, says that it’s “rare” that refinancing with your current lender will be “worthwhile.” They may take advantage of your loyalty by basing your new rate on your current rate and not offering a rate as low as the rest of the market.

Until recently, there hasn’t been data available to test either claim. Now, in the age of big data, we can finally answer the age-old question: does it pay to the loyal to your mortgage lender?

Academic evidence now show that lenders will take advantage of your loyalty.

In Allen, Clark, and Houde (2017) which uses Canadian data, the authors find that mortgage borrowers who have a previous relationship with a bank gets on average 0.09% higher rates. They interpret this as consumer loyalty with their lenders giving the banks an advantage in search and negotiation since many consumers do not get multiple quotes. In short, it does not pay to be loyal to your mortgage lender.

Furthermore, in research by Agarwal et al. (2017) using data from across the United States during a HARP refinancing wave, they find that if your pre-refinancing rate is 1% higher, your post refinancing rate is about 0.1% higher, even controlling for all the variables that may be relevant to underwriting. Furthermore, these evidences for market power by the current lender goes away in Jan 2013, when reforms to the HARP made it more possible to refinance with other lenders. This provides some further evidence on the Mortgage Professor’s claim that your current lender may take advantage of your loyalty by basing your new rate on your current rate.

Overall, the literature finds a small but significant effect where loyalty to your lender raises your rates, on the order of 0.1%.

When looking to refinancing your mortgage, even a 0.1% difference in rate could be a lot of money.

For example, if you have a 200,000, 30-year mortgage it could translate to an extra $200 a year, or $6,000 over the course of thirty years. Of course, the rate would matter less if you plan on paying the mortgage off early and moving, or plan on refinancing your loan again soon. Otherwise, it really pays to search for the lowest rate and sweat even the 0.1%.

It would be worth it to get a second opinion when your loan officer calls you for a refinance.

The loan officer you’ve been working with may have called you up and told you about a great opportunity to refinance. You may want to refinance because you can get a lower rate compared to an existing loan, or you may want to cash out some of the increases in your home’s value. In those cases, it could be worthwhile to get at least one second opinion to see if you’re getting the best rates possible.

In fact, after you get quotes from other lenders, you may be able to negotiate to get your current lender to match the lowest rate you found, giving you the best of both worlds.