Will I be penalized for switching mortgage lenders?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I want to refinance with bad credit and started working with a mortgage lender. Then I found out that I could get a better interest rate from someone else. If I switch to the new lender, do I have to pay the first lender? - Don, Boston, Mass.

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Dear Don,

Your lender can't charge you for anything other than for services already performed -- for example, a credit report or appraisal. In addition, lenders can't charge you upfront fees for anything but a credit report before you have been given your official written disclosures showing your loan's interest rate and fees.

You are entitled to switch lenders for just about about any reason. That said, you might want to consider a couple of things before changing lenders.

Check with your current lender

If you have not locked in your mortgage rate, chances are good that the lender you're already working with can give you a better deal. Rates might have dropped since you got your original quote, and it can't hurt to ask.

Get a real disclosure

If the new lender gave you a worksheet rather than a Good Faith Estimate (GFE), it is under no obligation to honor the rate quote. Before jumping ship, make sure that you could actually lock in the lower rate -- especially if you have credit problems. The first lender may have quoted a rate that takes your credit scores and loan-to-value into account, while the second lender may not have included any risk-based pricing adjustments.

Make sure you can close

Note that switching lenders may cause the refinance to take longer. You'll be starting over and will almost certainly need a new appraisal. A rate quote with a 30-day lock doesn't matter if the loan can't be closed in less than 60 days.

Compare service, not just price

Yes, a mortgage is just money, and the less you pay the better. However, a lender who doesn't follow up a low quote with good service may end up costing you. That's because if he or she doesn't ask the right questions, doesn't quote or lock the rate correctly, or doesn't close on time, you could end up getting your mortgage denied, blowing your rate lock, or getting the wrong loan product.

Get mortgage quotes online

Before you commit to the new lender, get additional quotes online. By requesting quotes online, you can get them all within a short time period, which makes the comparison more meaningful. Mortgage rates, like the prices of stocks and other investments, can change several times in a day. Know that the lender you decide to refinance with is truly offering the best deal.

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