June 24, 1999, Revised December 1, 2006, June 27, 2007, July 29, 2010, July 31, 2013, August 20, 2013 

A small group of borrowers might profit from refinancing with their current lenders – the firms to which they remit their monthly payment.  Most borrowers, however, will do better refinancing with a new lender.

Your Existing Lender Is Ambivalent About Refinancing You 

You are already a client, and your current lender would like to keep it that way. They know that many borrowers who could refinance profitably don’t do it, out of ignorance or lethargy, and they don’t want to put the idea in your head if you might otherwise not get around to it. This attitude suffuses their entire approach to refinancing their own customers.

If your existing lender is losing many clients to other firms, they may take the initiative in soliciting their own customers, offering an attractive rate reduction while giving up as little as possible. One way to do this is to base their offer on the borrower's existing rate. In a 5% market, for example, the borrower with a 7% mortgage might be offered 6% while an otherwise identical borrower with a 6% mortgage might be offered 5.5%. They can get away with this so long as their existing clients are not shopping other lenders at the same time.

If you do refinance with your current lender during a refinance boom, you may not get the best service. If your lender has to choose between processing a loan they will likely lose if they don't get it done quickly, or your loan which they already own, the choice is all too easy.

Note: Chris Hiner reminded me that your existing lender may have sold the loan to Fannie Mae or Freddie Mac and is servicing the loan for one of them, in which case they do have an incentive to refinance it. The problem is that without doing some research, borrowers don't know whether their existing lender still owns the loan or not.

You Have No Right to Rescind a Loan From Your Existing Lender

Borrowers who refinance with a lender other than their existing lender have the right to rescind the transaction within 3 days of closing, with the lender obliged to reimburse them for all payments made. This can be valuable protection for borrowers who realize they have made a mistake, or suspect that the lender has abused them in some way.

It is ironic that Congress thought that borrowers needed this extra protection when dealing with new lenders, when in fact they need it more when dealing with their current lender. But that is the way it is. See Rescinding a Mortgage Refinance.

The Rare Case Where Refinancing With the Existing Lender May Pay

If your current lender had originated your loan, still owns it, and would continue to own it after a refinance, it can refinance you with minimal settlement costs. The lender may forgo a credit report, property appraisal, title search and other risk control procedures that are otherwise mandatory on new loans. This is strictly up to the lender.

Indeed, if you are looking only to reduce the interest rate, and not to take any cash out of the transaction, and if your payment record has been good, the lender may elect simply to reduce the interest rate on your current loan rather than refinance it. This replaces all settlement costs with a small fee for amending the contract.

Cases where this is possible, however, are few and becoming fewer all the time. Most loans today are sold by the originating lender, and even when the loans are retained, the servicing rights may be sold. Lenders servicing for others do not have the same discretion to forego settlement procedures but must follow the guidelines laid down by the owner of the loan.

If the loan had been sold to one of the Federal secondary market agencies, Fannie Mae or Freddie Mac, the guidelines are theirs. While both agencies have provisions for "streamlined refinancing documentation", the discretion granted the lender, and therefore the potential cost savings, is quite limited.

The fact that your current lender would have lower settlement costs than a new lender does not necessarily mean that you will receive the benefit in your mortgage price. If your current lender believes that you will accept any rate that is below your current rate, it is very unlikely that you will receive the best possible deal.

The Case For Shopping Elsewhere

The best argument for ignoring your current lender is that you can take advantage of internet-based shopping at sites offering competing lenders, many of which did not exist when you took out your current mortgage. 

I don’t mean to suggest that internet-based shopping is a walk in the park – it has its own challenges, and yes, it has its hazards as well. But help is available, which is not usually the case when dealing with your current lender. My article on Shopping For a Mortgage on Multi-Lender Web Sites will take you to a table showing the features of 13 major multi-lender mortgage shopping sites. Only one of them -- the best, of course -- is mine.