You’ve undoubtedly heard the expression “Time is money.”
When it comes to shopping for a mortgage, we’re going to tweak it slightly by saying “Time can save you money.” Putting in a little time and effort on the front end to compare mortgage types, rates, and offers can help you get the best deal and ultimately help you save money, possibly even thousands of dollars over the life of your loan. Comparing mortgage interest rates and comparing loan terms is a little more involved than just doing a quick online search, but it’s not too complicated. We’re going to walk you through how to obtain and compare offers from different lenders, and then how to choose which one to go with.
First things first: let’s address how many mortgage quotes you should obtain. Luckily, you can get as many as you want, but 3 – 5 is ideal in order to find the best rate and maximize your savings. Familiarize yourself with application fees or other fees that may apply, depending upon the lender and location of the subject property. Keep in mind that once you pull together the required documentation for one lender, you’ll be able to use it for the other lenders as well. The application process is made even easier because most lenders offer online preapproval applications. (In fact, AmeriSave’s preapproval process can be completed in as little as 3 minutes.) And until you sign closing documents, there’s no obligation to stick with a certain lender once you have an offer, so consult with multiple mortgage companies. When you get an offer you like from one of the lenders, don’t necessarily jump on it; use it to negotiate your rate or fees.
If you’re wondering how obtaining competing offers can affect your credit, it depends on whether you have a soft credit pull or a hard credit pull. This may depend on whether you’re getting pre-qualified or pre-approved. Pre-qualification or pre-approval policies may vary by lender, and this information is offered for general informational purposes. Pre-qualification is a good first step and allows a mortgage banker to give you input on whether you’re likely to qualify for a mortgage loan and for how much based on general input you provide about your finances. A pre-approval, on the other hand, requires you to supply bank statements, pay stubs and other financial documentation, and some lenders use this data along with lender financial risk models to determine your level of credit risk and likelihood of default. The good thing about pre-approvals, though, is that they result in a verified approval and let you know your interest rate and loan amount.
Pre-qualification usually requires a soft credit pull, which does not affect your credit score. A pre-approval requires a hard credit pull, but this typically only lowers your score by a few points. If you get all of your quotes within a few weeks of each other, the “pulls” will typically show up as a single inquiry, minimizing the impact to your credit score. Even better, if you get all your rate quotes on the same day, you get the most accurate comparison across lenders. Mortgage rates and closing costs can change significantly from one day to another, so if you are comparing offers from multiple lenders it should ideally be done on the same day.
Now that you know some basics, let’s go through how to shop for a mortgage.
Seek referrals and read customer reviews.
Talk to your friends and family to see if they can recommend a lender they like. Read up on mortgage companies and check with your existing financial institution to see what mortgage options they have. Consider talking to a mortgage broker, who can talk to multiple lenders and comparison shop for you, if you want some additional assistance. Once you have narrowed a list of lenders to consider, do some online research and find out what other applicants like you have to say about the application process, closing and servicing of the loan.
Pull your documentation together so you have it ready before reaching out to lenders. Lenders want to see official documents that show proof of income, verify assets and investments, as well as your outstanding debt. Commonly requested documents include W2s and tax returns, bank and investment statements, and debt records such as those related to car loans and student loans.
Shop and seek preapproval.
Reach out to 3 – 5 lenders to inquire and start getting quotes (remember, this should ideally be within the same timeframe or even the same day).
Compare Mortgage Offers.
- Compare rates. When you first start shopping, you’ll want to consider whether you’d benefit more from a fixed vs. adjustable-rate mortgage (ARM). With a fixed rate, your interest is consistent month to month because the rate stays the same for the life of the loan term. With an adjustable rate, after a specific period if time, interest varies as the market does. A “good rate” is a relative term and depends on your unique situation (which is why shopping around makes sense) but if you’re refinancing , your new rate should be lower than the existing one to even make it worth your while.
- Compare loan type, loan term and other factors. Look at not only the rate but also the loan type and loan term. Make sure you are comparing current mortgage rates for the same type of mortgage. For example, if you are shopping mortgage rates and have a quote for a 30-year fixed rate mortgage at 4.75%, only compare it to other 30-year fixed quotes at 4.75%. Read our guide to mortgage interest rates to learn more about finding the best rates for you.
- Compare the total of all points and lender fees for each mortgage. We get into fees a bit more below, but pay close attention to loan costs, as they vary between lenders and can offset what otherwise looks a good offer (i.e., you may have a lower interest rate but get stuck with higher fees. Alternatively, you can get a lower rate by buying points, which means you agree to pay more fees up front to reduce your interest rate. Read here to learn more about how mortgage points work). All of this information can be found on your Loan Estimate (LE) document from each lender.
- Compare loan estimates. Lenders are required by law to provide you with a Loan Estimate (LE) within 3 days of receiving your application, and every lender uses the same form. The LE breaks down the rate, loan type, term and fees, making it easier to do a 1:1 comparison between lenders and ultimately see what your monthly payment would be with each. Comparing loan estimates closely by reviewing rates vs. points vs. fees can help you make the most informed financial decision about which offer to take.
That’s why you shopped around in the first place, right? There’s no harm in asking one lender if they can meet the terms offered to you by another. You may end up with lower fees or even a better rate. Even a small rate adjustment can translate to lots of savings over time. But keep in mind that some charges, such as recording fees and tax service fees, cannot be negotiated.
You may want to use a mortgage calculator, which can help you estimate your monthly payments. You can also use a mortgage loan comparison calculator to help inform your decision. As part of the decision making, consider what your repayment periods are and if there are prepayment penalties if you pay the loan off early. You’ve done the hard work of shopping around, so now it’s time to choose and then lock in your rate so that it doesn’t change prior to closing. Rate lock options usually include 30 or 60 days, though AmeriSave offers the benefit of a 90-day lock. Time to closing is usually 45 – 60 days, starting with when you complete an application up until when the loan funds.
Understanding Closing Costs and Other Fees
Closing costs consist of three main groups: third party costs, mortgage taxes and lender fees.
- Third party costs are fees that you or the lender pays on your behalf for you to obtain a mortgage, including appraisal fees, credit report fees, title fees and closing attorney fees.
- Mortgage taxes will be the same between all lenders as they are real estate taxes determined at the county or city level where the property is located.
- Points and lender fees are essentially what the lender charges to originate your home loan. As we’ve said, points and fees should be reviewed carefully.
As part of this review, keep an eye out for hidden fees and ask the lender for an explanation on anything that sounds unfamiliar. If you’re refinancing a current loan, consider if you’ll save enough money on the new loan to offset closing costs and other fees. Additionally, some loans require private mortgage insurance (PMI), which is something else you might be required to pay if you’re making a down payment that is less than 20% of the loan amount. Read our guide to private mortgage insurance to understand if your circumstances require paying PMI. Read here to see if putting less than 20 percent down for a mortgage could work for you.
As you can see, there are lots of factors to consider when shopping for a mortgage. It helps to have a lender you feel comfortable with to talk through these factors. At AmeriSave, our trusted mortgage bankers are always ready to help you get pre-qualified or pre-approved, talk through rates and loan terms, review your loan estimate and help you decide when it’s best to lock your rate. Reach out to us today if you’re shopping mortgage lenders.