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When a first-time homebuyer hears the word “mortgage,” they don’t often think of it as a product. The idea they can comparison shop for one seems strange. Isn’t loan qualification based on the same criteria? The truth is that the price and terms of a mortgage are often negotiable and vary lender by lender. In fact, the CFPB says homebuyers can potentially save $600 to $1,200 a year by getting offers from multiple lenders, which adds up to thousands over the life of the loan. Before a commitment this significant, it’s a necessity to compare mortgage lenders.
Comparison shopping for a mortgage isn’t common. A 2015 report from the Consumer Financial Protection Bureau on borrowers who closed their loans in 2013 found that almost half seriously considered only one lender or broker, and fewer than one in four applied to more than one. Borrowers who skip shopping may overpay for their mortgages.
As you shop around for a mortgage, below are the main points to keep in mind as you secure an affordable price and attractive terms.
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Why is it important to shop around for a mortgage?
Before you begin the process of comparison shopping, a little context will help. There isn’t a standard set of rules or offers among all mortgage lenders. Each lender sets its own underwriting guidelines, fees, and interest rates. As a result, you may find a better deal with one lender than with another.
To start, you’ll want to find a mortgage lender that offers a good interest rate. Changing rates have a compounding impact over time and even a slight increase like 0.5 percent costs a considerable amount of money over the life of a loan. The interest rate type matters too. An adjustable-rate mortgage may rise at some point in the loan term and increase your monthly payment. Fixed-rate loans by comparison won’t change.
Points, fees and other costs to weigh
There are also other factors that will influence your final decision beyond interest rates. Consider the following when you compare mortgage lenders:
- Points. Fees that have a link to your interest rate. Usually, the more points you pay, the lower the rate.
- Fees. Assorted fees such as loan origination and underwriting fees, broker fees, etc. Many are negotiable.
- Closing costs. The costs associated with closing your loan. The lender or broker should have an estimate if you ask them.
- Down payment. Minimums depend on the loan type: conventional loans can start at 3% down, FHA loans at 3.5%, and VA and USDA loans at 0% for eligible borrowers. Some lenders require more. A conventional down payment under 20% will likely require private mortgage insurance (PMI).
- Private mortgage insurance. PMI is an additional cost added to your mortgage to protect the lender in case of borrower default when the loan down payment is low.
If you have questions about what you’d qualify for, you can consult a lender directly about the details of the mortgage.
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Questions to ask when you compare mortgage lenders
Before you meet with lenders, it’s best to be prepared. Asking the right questions (hint: they should go beyond interest rates) allows you to learn the most about your options. The questions below are a good place to start.
- Do you communicate with clients in person, or through text, emails, or phone calls? How quickly do you respond?
- What lender fees am I responsible for at closing? Can any be waived or rolled into the mortgage?
- How long is your average turnaround time for pre-approval, appraisal, and closing?
- Does buying discount points to lower my rate make sense?
- What are the down payment requirements?
When you have the relevant information, it’s easy to make an informed decision and choose the mortgage that’s right for you.
How to find mortgage lenders to compare
A simple search online is the easiest way to locate lenders. Though, don’t underestimate asking friends, family, or real estate agents for their recommendations. Similarly, look out for lenders with high ratings. If other homebuyers feel positively about their experience with the lender, they’re a far better candidate than another with poor reviews.
Keep in mind any rates you see online are just estimates, and you may pay more depending on your situation. You can use your research as leverage when negotiating your mortgage rates and could improve your chances of finding the most affordable mortgage for you.
Also, ask each lender what application and appraisal fees it charges, when you pay them, and whether any are refundable if you don’t close with that lender. If a lender can’t answer clearly, you should look elsewhere.
Before you meet with lenders
First, review your credit report. Equifax, Experian, and TransUnion legally must provide a free copy of your report once every 12 months. In addition, all three let you check your report from each for free once a week at AnnualCreditReport.com. If there are any issues on your report, it’s best to resolve those before reaching out to lenders.
Next, review the different types of mortgages to see which is ideal for your financial situation. From conventional loans to government-backed loans like FHA and VA to interest-only mortgages to other hybrid and specialty types, you’ll have no shortage of options when shopping around. Also, decide if you want an adjustable-rate mortgage or a fixed-rate mortgage.
As you evaluate the various loans, give thought to which will work best for you. An FHA loan may appeal to you with its minimal down payment and credit score requirements, or if you’re a veteran or active-duty servicemember, then a VA loan may interest you. There isn’t a one-size-fits-all solution.
Should you shop around for a mortgage?
Yes, comparison shopping for a mortgage can mean more money in your pocket. Start with some basic research and talk to lenders. Once you have a foundation of planning and preparation, you’ll feel confident in your choice and save money in the process.
