Before you choose a mortgage offer, it’s important to shop around and compare multiple offers to get the best deal. In fact, borrowers can save an average of $1,500 over the life of a mortgage by simply obtaining one additional quote. And those who obtain a total of five quotes can save an average of $3,000, according to a study conducted by mortgage underwriter Freddie Mac. 

Why compare mortgage offers?

Shopping around for a mortgage is an important step to ensure that you’re getting the most competitive rate and mortgage terms possible. It’s an effort that can save a substantial amount of money up front and over the life of a mortgage as well. Even an interest rate savings of as little as 0.1 percent, for instance, can result in thousands of dollars remaining in your pocket over the life of a mortgage, according to Bankrate’s mortgage amortization calculator.

In addition, many homebuyers don’t realize that the price and terms offered on a mortgage may be very different from one lender to the next, as each lender sets its own underwriting guidelines. You may even be able to negotiate mortgage costs with a particular lender.

Because a mortgage is one of the most substantial financial commitments you’ll make in a lifetime, it’s important to do your due diligence and ensure you’ve investigated all of your options thoroughly.

How to shop for a mortgage

Step 1: Determine the right type of mortgage for you

Before you embark upon mortgage shopping, it’s important to determine what type of mortgage you want to apply for and what might be best for your unique financial situation, as well as your short- and long-term goals. Some of the questions that can help identify the most suitable mortgage for your needs include:

  • Where are you in your life and how long do you intend to stay in the home?
  • Are you single?
  • Are you planning to have children?
  • Are you likely to change jobs in the coming years? 
  • Is your income stable or likely to fluctuate?
  • How much of a down payment will you bring to the table? Do you have 20 percent or will you need a mortgage program that requires a smaller downpayment, such as 3 percent?
  • What is your credit score?
  • Will you be shopping for a particularly expensive home that may require a larger loan than conventional loan limits?

Answering these questions will help determine how long you plan to stay in a home and thus the best loan term for your needs. Some of the additional questions can also help you narrow down whether it makes sense to apply for a fixed-rate or adjustable-rate mortgage and hone in on the specific type of loan program that you may want to apply for based on the size of your down payment, loan needs or credit score.

Some of the mortgage options to consider include a conventional mortgage, government-issued mortgages such as an FHA loan, USDA loan, or VA loan, fixed rate mortgage, adjustable-rate mortgage and a jumbo loan.

Step 2: Gather the necessary documentation

Once you know the kind of mortgage and term you want, gather documents that show your income, investments, debt and more. In order for lenders to give you the most accurate quote, they’ll need your:

  • Tax returns
  • W-2 forms and other documents reporting income
  • Bank statements
  • Statements for any investments, including brokerage and retirement accounts
  • Records of all your debt, including student loans, car loans and personal loans
  • Renting history
  • Gift letters indicating that money gifted to you to buy a home is not a loan, if applicable
  • Divorce, child support and alimony documentation, if applicable
  • Records of bankruptcy and foreclosure, if applicable

Step 3: Compare mortgage offers online

Once you have your documents handy, you can compare mortgage offers online. Talk to your bank or any other financial institution you have a relationship with as well, because they may offer better deals to existing customers. Many banks award you a better rate if you set up automatic payments, or potentially if you maintain business or investing accounts with the institution. It’s a good idea to ask family and friends for referrals, too.

In addition, consider contacting a mortgage broker, who may be able to find you an offer you can’t find on your own. Mortgage brokers often work with lenders known as wholesalers, which don’t provide loans directly to consumers. Brokers earn their fees by finding the right lender and product based on your needs and situation and helping you navigate the process.

Don’t be shy about reaching out to a mortgage lender by phone as you shop for mortgages. It can be a good idea to speak directly with a loan officer or prospective lender who can assess your unique financial situation and provide expert advice.

How to compare mortgage rates

When shopping around for a mortgage, it’s important to compare mortgage rates. Bankrate can help you shop for mortgage quotes through our mortgage rate tables, which allow you to plug in general information about your finances and location to receive tailored offers.

When comparing offers, consider the interest rate and annual percentage rate (APR). Interest rates can be fixed or variable and are determined by market factors and your own creditworthiness. The APR, on the other hand, includes the interest rate and fees incurred when borrowing. The APR is the better tool for comparing the cost of a mortgage; however, if you’re not planning to stay in a home long-term, the interest rate might matter more, since APR assumes you’ll stick with the loan over its full term.

Keep in mind that the interest rate only tells you so much about the cost of buying a home. Lenders typically disclose additional closing costs on the loan estimate. The difference in closing costs might turn out to be more important than small differences in the interest rate.

Understanding the loan estimate

The loan estimate is an official three-page document that lists your loan amount, quoted interest rate, fees and all other costs associated with the loan. Comparing loan estimates can help determine which offer is more cost-effective.

Every lender is legally required to provide you with a loan estimate within three days of getting your application and pulling your credit report.

What to consider when comparing loan estimates

The loan estimate is an official three-page document that lists your loan amount, quoted interest rate, fees and all other costs associated with the loan. Comparing loan estimates can help determine which offer is more cost-effective.

Every lender is legally required to provide you with a loan estimate within three days of getting your application and pulling your credit report.

On the loan estimate, keep an eye out for:

  • Balloon payment: Mortgages with balloon payments have a lower monthly payment for a period of time, usually only interest. Then, you must refinance or pay off the full balance at the end of the term. If you won’t be in the home long-term, this might be one way to ensure a lower payment.
  • Prepayment penalty: This is a fee you must pay if you pay off your loan early. Most mortgages don’t have a prepayment penalty, but it can’t hurt to confirm.
  • Private mortgage insurance (PMI): This is an additional monthly cost for borrowers who put down less than 20 percent.
  • Estimated cash to close: This is the total cash needed to close the loan, including outstanding closing costs and prepaids.

Some lenders promise low interest rates but also charge excessive fees and closing costs, so make sure you pay attention to all the loan terms, not just the rate.

Some lenders may quote you a low rate made possible by purchasing mortgage points. Also known as discount points, these are upfront fees you pay to lower your interest rate. Depending on the cost of those points, this may not make sense for you. A different lender may be able to offer you the same rate or better without the need for points. Again, how long you plan to stay in the home and keep the mortgage is a key factor in deciding whether to buy points.

How to choose a mortgage lender

Here are some of the steps to help you o find the best mortgage lender:  

  1. Compare at least three lenders: Your comparison effort should preferably include a bank and then other types of lenders. 
  2. Use offers as leverage: When you obtain an offer you like, don’t stop there. Use it as leverage to get better deals from other lenders.
  3. Review costs carefully: Once you have multiple offers, , take a mental magnifying glass to all costs listed, and consider them and your budget before choosing which lender to work with.
  4. Lock in your rate: You’ll do plenty of leg work to find the best deal, so once you’ve chosen a mortgage offer, consider locking in your rate to guarantee it doesn’t change before you close. 
  5. Find out how much a rate lock costs: Be sure to ask how much a rate lock will cost you and even more importantly how long it lasts and whether it can be extended (and for how much).
Amount borrowed Loan term Interest rate Monthly payment (interest and principal) Total loan cost
$320,000 30 years 5.81% $1,879 $677,068
$320,000 30 years 5.31% $1,778 $640,928

Bottom line

Shopping for a mortgage is well worth your time, especially if you plan to remain in your home for the long term. While saving 1 percent might not seem like much upfront, it makes a significant difference over the duration of your loan. Take the extra time to search for a mortgage that fits your need and budget. Your wallet will thank you for it.