Should you switch lenders during the mortgage process to get a lower mortgage rate?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

It is certainly possible to switch lenders during the mortgage process.  For example if you find a lender that offers a lower mortgage rate after you have submitted your loan application you may want to change lenders.  While this is definitely doable, there are several important points to keep in mind before you make the move. 

First, make sure that you are comparing similar proposals. For example, if one lender is offering a lower mortgage rate make sure its closing costs are similar to the other lender. If the lender with the lower rate is charging much higher fees, that may explain why its rate is lower.  Those loan terms may actually be less attractive when you factor the time it takes to recover the higher closing costs.

Specifically, make sure the lender with the lower rate is not charging discount points, which is an optional cost that you can elect to pay to lower your mortgage rate. In short, you want to make sure that the fees and other cost items are relatively consistent across both lenders.

The best way to do this is to review the loan estimate provided by both lenders. This document enables you to compare mortgage rates, detailed closing costs and key loan features across several lenders to determine the best proposal.

Second, you need to make sure the new lender can process and close your loan according to your desired time frame, if you do decide to switch. In most cases, the home purchase process has a set timetable dictated by your closing or settlement agent, which is usually an escrow company or attorney, depending on where you live.

For example, you may have a 30, 45 or 60 day escrow period in which your mortgage and home purchase are required to close. Make sure that your new lender can meet this schedule or you may be forced to extend your escrow which can be problematic.  Plus, the property seller may not agree to this. (The closing timetable for a refinance is also important but there is usually less time pressure).

I recommend that you have the new lender put in writing the timeline required to close your loan. You do not want to lose the home you want to buy because your new lender could not complete their underwriting and other internal processes fast enough.

Another point to keep in mind is the ability to transfer your appraisal report, if your current lender has already ordered one.  Property appraisals are usually transferable but you should make sure that the appraiser is approved by your new lender.

Although you pay for the appraisal report, the appraiser is actually hired by the lender so you need to confirm that they are on your new lender's list of approved appraisers. Additionally, you may need to pay an extra fee ($100 - $200) for the appraiser to re-issue the report to your new lender.

If you are comfortable with the issues outlined above, then it probably makes sense to switch lenders, especially if you can lower your mortgage rate by at least .250% while keeping your closing costs roughly the same.

Another option for you to consider is to see if your existing lender is willing to lower its interest rate to match the other proposal. That way you avoid the additional expense and potential complications incurred by changing lenders but you benefit from the better mortgage terms. If you current lender is unwilling to match the lower rate, then it likely makes sound financial sense to make the switch.

Please note that you can cancel your mortgage and change lenders any time prior to singing your loan documents for a home purchase loan.  For a refinance you can cancel your loan up to three business days after you sign your loan documents.

If you decide to switch lenders, we recommend that you contact multiple lenders to understand how they would handle your unique situation.  When you speak with lenders be sure to ask about their approval process and how long it takes to close and fund your mortgage.

Sources

"Finding and Working With Your Lender."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.