You like the idea of lowering your mortgage loan's interest rate through a refinance. But you're not thrilled with having to provide the piles of paperwork that lenders need to verify your income, employment status and financial assets.

But if you refinance with the mortgage lender that is currently servicing your loan -- the same one you send your home-loan payments to each month already -- you won't have to worry about gathering all that paperwork. Right?

Actually, no.

Starting over

Even if you refinance your mortgage loan with the lender that already holds your loan, you'll still have to provide such paperwork as your last two pay stubs, most recent W-2 form, tax-return documents and your last two months of bank statements.

This might seem unnecessary. But look at it from your lender's point of view: A lot might have changed since you first took our your mortgage loan, and your lender -- even if you've never missed a mortgage payment -- has a responsibility to make sure that you can afford your monthly payments after your refinance closes.

And yes, this holds true even if your new monthly mortgage payment will be smaller, thanks to that lower interest rate, after you refinance.

"Sometimes you wonder, 'I've been paying my loan for eight years. All I want to do is lower my interest rate. I've never missed a payment. Why should I have to provide all that paperwork again?'" said Don Frommeyer, senior mortgage originator with the Carmel, Ind., office of American Midwest Bank. "But those are the rules."

The reasoning

There is sound reasoning behind this. Maybe when you first took out your mortgage loan five years ago, you were earning $4,000 in gross income a month. Since that time, you might have lost your job and found a newer one that pays less. Maybe now you're earning just $3,000 in gross income every month.

That makes a big difference. Your lender might worry that your reduced income might make it challenging for you to afford your mortgage payment after refinancing, even if that refinance will reduce the home-loan payment you need to make each month.

What if your spouse has lost a job since the time you first qualified for your mortgage loan? That, too, can significantly reduce your household income. If you used both your income and your spouse's when you first applied for your loan, you might no longer make enough money to qualify for even the reduced payment that comes with a refinance.

Your lender can't go back in time to undo the original loan it gave you. But it might not be willing to give you a new loan if your income has changed significantly since.

Lenders are protecting themselves by requiring their current customers to submit more paperwork when they request a refinance. Remember, your lender doesn't want you to default on your monthly payments. One way to prevent this from happening is to make sure that your income levels are high enough and your job status secure enough.

"Situations can change, and because of the financial responsibility to make sure customers can repay the loan, we are required to maintain generally the same standards on every loan transaction," said TJ Freeborn, senior manager of customer experience at Discover Home Loans.

Credit score matters, too

When you apply for a refinance, your lender will run your credit, too. This will happen even if you are refinancing with your current mortgage lender.

Again, this might seem unnecessary. But not to your lender. You might have missed several car payments or sent in several late credit-card payments since you first took out your mortgage loan.

This could change your lender's former opinion of your ability to repay a loan on time each month.

"Your credit score might have changed," said Pej Barlavi, owner and chief executive officer of New York City's Barlavi Realty. "Maybe you had a score of 710 when you first took out your mortgage loan. Now your score might be down to 680. That makes a difference."

If your score has dropped too much since you first took your loan, you might not qualify for interest rates low enough to make refinancing your loan a smart financial move. You need an interest rate that is low enough so that your monthly savings allow you to quickly recover the closing costs associated with a refinance.

Is your current lender the best choice?

This doesn't mean that there aren't advantages to refinancing with your current lender. Freeborn says that Discover Home Loans does keep existing information on file from the previous loans that their customers took out. This can make the refinancing process move at a faster clip.

The key to a successful refinance, though, is to find the lender that is willing to give you the lowest interest rate and charge you the smallest amount of closing costs. You might think this will be your current lender. But it might not be. Fortunately, you can refinance with any lender licensed to do business in your state, not just the one currently holding your mortgage loan.

And if you do determine that your current lender is the best choice for your refinance? That's OK. Just don't be surprised when your lender requires you to send in the same paperwork required by any other lender doing its due diligence.

If you are looking at someone who is refinancing a multi-million-dollar home, they tend to understand the process. They're not surprised when they have to send in the same paperwork," Barlavi said. "But the younger kids are the ones who are sometimes surprised by this. Maybe they're in their first home and they're ready to refinance. They went through the process once, but all of a sudden they're on the hook to do the whole thing over again. Often, they're not prepared for that."

Published on March 2, 2015