Before you choose a mortgage offer, it’s important to shop around and compare multiple offers to get the best deal. According to a Consumer Financial Protection Bureau study, the average borrower could have saved $300 a year, or $9,000 over a 30-year mortgage, had they gotten the best mortgage interest rate available to them.
How to shop for a mortgage
Before you begin comparing mortgage offers and rates, consider the kind of mortgage you want and what you can qualify for. Common loan types include:
Also consider the loan term, or the time frame in which you are required to pay off the loan plus interest. Mortgages commonly come in 15-year or 30-year terms, but you can find ones with other terms as well.
Once you know the kind of mortgage and term, gather documents that show your income, investments, debt and more. In order for lenders to give you the most accurate quote, they 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
- Utility payment records
- Renting history
- Gift letters indicating that money gifted to you to buy a home is not a loan
- Divorce, child support and alimony documentation (if applicable)
- Records of bankruptcy and foreclosure (if applicable)
Once you have these handy, you can compare mortgage offers online. Talk to your bank (or other financial institution you have a relationship with) as well — they may offer a better deal to existing customers — and ask family and friends for referrals.
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 work with wholesale lenders who don’t work directly with consumers.
“If you’re feeling particularly overwhelmed by the process or you’re looking for a higher touch experience, a mortgage broker may be able to help,” says Austin Kilgore, director of digital lending at Javelin Strategy & Research. “A mortgage broker shops your application around to find you the best rate.”
How to compare mortgage rates
When shopping around for a mortgage, it’s important to compare mortgage rates. You can do this online with Bankrate, which allows you to set specific preferences, like loan amount and credit score, to find quotes from different lenders.
Keep in mind that the interest rate only tells you so much about the cost of buying a home. Getting a mortgage generally comes with closing costs and can include fees such as:
- Application fee
- Credit report fee
- Appraisal fee
- Underwriting fee
- Property taxes and other government fees
Lenders disclose these costs on the Loan Estimate.
What to know about the Loan Estimate
The Loan Estimate is a 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.
“The Loan Estimate is a great tool for consumers because it gives them a real apples-to-apples comparison of all the intricate details of a loan,” Kilgore says. “Every lender uses the exact same form, which makes it easier to do a side-by-side comparison.”
Every lender is legally required to provide you with a Loan Estimate within three days of getting your application and pulling your credit report. The costs listed on the Loan Estimate generally don’t change any time in the mortgage process.
“Fees can decrease on a Loan Estimate but not increase,” says Ralph DiBugnara, vice president of Cardinal Financial.
On the Loan Estimate, keep an eye out for fees that may sound unfamiliar, including:
- Balloon payments: A fee you pay at the end of the loan term, typically applied in exchange for lower payments during the first few years.
- Prepayment penalties: Fees you must pay if you pay off your loan in the first few years.
- Homeowners insurance premium: Insurance premiums that may be applicable if you make a small down payment.
- Estimated cash to close: A payment you must make before your loan is finalized (in addition to closing costs).
Some lenders promise low interest rates but also charge excessive fees and closing costs. You can easily detect this if the rate on one Loan Estimate is low compared to others, while the closing costs are drastically higher.
Some lenders may quote you a low rate, but they’re only possible if you buy 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.
How many mortgage quotes should you get?
There is no definitive answer, but the CFPB recommends consulting with multiple lenders to maximize your potential for savings.
Don’t stop when you find an offer you like, either. Use that offer as leverage to get a better deal from another lender. Even if the other lender offers you a loan with the same fees but a slightly better rate, you can save money.
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What’s a good mortgage rate?
The average 30-year fixed-rate mortgage is 3.45 percent as of June 4, according to Bankrate data. Over the past few decades, the average rate is closer to 8 percent. As you shop around, look at current mortgage rates to see what you can expect to find.
Will shopping for a mortgage hurt my credit?
When mortgage lenders check your credit report, the credit reporting bureaus record it as a “soft” inquiry. This means it makes an insignificant dent on your credit score that eventually goes away. Any credit checks by lenders within a 45-day window count as a single soft inquiry on your credit report.
How to choose a mortgage lender
To find the best mortgage lender, compare as many offers as you’re comfortable devoting time to. Closely compare the Loan Estimates side by side. Take a mental magnifying glass to all costs listed, and consider them and your budget before choosing which lender to work with.
You’ve done plenty of leg work to find the best deal, so once you’ve chosen a mortgage offer, consider locking in your rate to guarantee that rate for a specific period of time.
Featured image by Lindasj22 of Shutterstock.