Original lender may be the best source of refinancing
By Michael D. Larson • Bankrate.com

When it comes to refinancing, there's no time like the present. As mortgage rates continue to fall, consumers stand to save thousands of dollars on their monthly payments and interest.

Increased business may mean more of a wait for the new loan. To avoid problems, experts say people should consider going to their first mortgage lender when refinancing.

Call first lender first
"Anybody that is in the 8 percent and above range for a 30-year fixed-rate mortgage should be calling their mortgage lender now to determine what kind of savings they're going to get," says Dan Frahm, a spokesman for Norwest Corp., which refinances loans in all 50 states.

"Many of these lenders that have programs for their own customers will require no documentation," he adds. "It is a new mortgage, but clearly they have the majority of the information already in hand."

Thanks in large part to mortgage rates being near their lowest levels in 40 years, refinance activity has surged. That, in turn, focuses attention on the speed and convenience of the process, where keeping hassles to a minimum often means asking a lender the right questions.

Among them: Will I save on closing costs because my appraisal, credit and income information already is on file? Do you use the automated underwriting systems operated by Fannie Mae and Freddie Mac? Are there any other special offers you can give me because I'm a customer already?

Why it matters
The first question is important for people who are satisfied with their mortgage lender or servicer. Often, the two aren't the same because lenders routinely use a second company to collect payments and in other ways maintain the loan. Between the two, a large part of the borrower's information, normally required in a refinance, is already on file. And that means the companies don't need to hire third-party providers to find out more about a borrower's income, property value and credit history.

"It's much more streamlined for the current portfolio because we already have the data from the borrower," says Mark Nieberlein, a senior vice president for retail loan production at Dallas-based Capstead Mortgage Corp. "There is a limited credit review, no appraisal necessary ... "

"A borrower's time is saved, and the company's cost to underwrite the loan is saved, and therefore passed through to the borrower," Nieberlein says.

Consider closing costs and shop around
Borrowers should consider whether paying slightly more in closing costs in exchange for a better rate elsewhere would save more money, however. A $125,000 30-year fixed-rate loan at rates from August 2000 of 8.24 percent resulted in monthly principal and interest payments of $938 and a total interest paid of $212,754. If refinanced at 6.90 percent, the monthly principal and interest payment would be $823 and the total interest paid would be $171,370, saving $115 a month on payments.

A Bankrate.com calculator can help determine how long it will take to recover the cost of refinancing. Or borrowers can ask their lenders for amortization tables on both loans. The tables allow people to check their costs and remaining balance at any point in the loan. The point at which the new loan's savings in interest and monthly payments eclipse the closing costs is the point at which the borrower breaks even.

Ask how they do it
Consumers also should know whether their prospective lender uses either Freddie Mac's "Loan Prospector" system, or the Fannie Mae counterpart "Desktop Underwriter," because that can speed the refinance process. The two quasi-governmental corporations buy mortgages from lenders in order to package them together for sale to investors as securities. Together, their systems evaluate a potential borrower's credit and other application information, and, in some cases, they can return an answer almost instantly thanks to computerized data transmission between the agencies and participating lenders.

"It gives a credit decision within two minutes after all the data are entered," says Freddie Mac spokesman Jeff Noe.

"Assume somebody's coming in and we can do a streamlined refi through the Fannie Mae or Freddie Mac system, it would save them time and money," says Ed Sensor, chief executive officer of the Banknorth Group Inc.'s mortgage division.

"The main difference, whether ... they're an old customer or new one, is if they've had a mortgage they've been paying on and are a good credit risk, those loans can be approved very rapidly," says Sensor. The Burlington, Vt.-based company originates mortgages through seven subsidiary banks in that state, New Hampshire and Massachusetts.

Of course, customers who return to their first lender may find special deals that go beyond closing cost reductions. Sensor says it will modify the rate on a small portion of the loans it originates and doesn't sell into the secondary market. A good customer that is seven years into a 15-year fixed-rate mortgage, for example, might have the mortgage rate dropped by .75 percent without a closing, appraisal or any of the other hassles associated with a regular refinance.