Before you choose a mortgage offer, it’s important to shop around and compare multiple offers to get the best deal. In fact, borrowers could have saved about $300 a year, or $9,000 over a 30-year mortgage, had they gotten the best mortgage interest rate available to them, according to a Consumer Financial Protection Bureau study.

How to shop for a mortgage

Step 1: Determine the right type of mortgage for you

Before you begin comparing mortgage offers and rates, consider the kind of mortgage you want and what you can qualify for:

Also consider the loan term, the period you have to pay off the debt. Mortgages commonly come in 15-year or 30-year terms, but other terms are available. Consider where you are in your life. Are you single? Are you likely to change jobs? Are you planning for children? Do you have older parents who might live with you in the future? The answers to these questions inform how long you plan to stay in the home, which can help you determine the best loan term and other factors like getting a fixed- or adjustable-rate 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.

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

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 many mortgage quotes should you get?

There is no definitive answer, but the CFPB recommends consulting with at least three 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.

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

How to choose a mortgage lender

To find the best mortgage lender, compare at least three lenders, preferably a bank and then other types of lenders. When you get an offer, take a mental magnifying glass to all costs listed, and consider them and your budget before choosing which lender to work with.

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. Find out how much a rate lock costs, how long it lasts and whether it can be extended (and for how much).

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.