By Andrew Dehan
Bankrate.com
Because a mortgage is one of the most substantial financial commitments you’ll make in a lifetime, it’s important to shop around and compare mortgage offers. For example, the difference between a mortgage rate of 5.75 percent and 6.75 percent on a $350,000 loan would save you about $200 on your monthly payments and over $80,000 over a standard 30-year loan term.
Lenders adjust their rates throughout the day based on the business they want, so you can see widely different rates on the same day with different lenders.
Keep reading to learn how to compare mortgage offers and find the best loan for your needs.
How to Compare Mortgage Offers
Step 1: Determine the Right Type of Mortgage for You
Before you start to shop for mortgage offers, it’s important to determine what type of mortgage you want to apply for. There are a couple different types of loans to consider. Let’s start with what secures them, then talk loan terms and rate types.Private vs. Government-backed Mortgages
- Private mortgages: Also known as conventional loans, these mortgages are backed by private institutions. They have slightly higher requirements than government-backed loans, but can also have fewer fees and restrictions. Conventional mortgages are some of the most common mortgages.
- Government-backed mortgages: These loans are insured by the government but are underwritten through lenders. This insurance allows for looser requirements on things like credit scores and down payments. FHA loans, VA loans, and USDA loans all fall into this bucket.
Loan Term and Rate Type
- Loan term: Mortgage loans can come with different term lengths, most commonly ranging from 15 to 30 years. A shorter loan term means paying less interest with a higher monthly payment.
- Fixed vs. adjustable-rate: Most mortgages are fixed-rate mortgages. These have a flat rate where your monthly principal and interest payment will be the same throughout the loan. Adjustable-rate mortgages (ARMs) offer a lower-than-average introductory rate for a set number of years, followed by a rate that adjusts to the market every six months to a year.
Bankrate Insight
Some of the questions that can help identify the most suitable mortgage for your needs include:- Where are you in your life?
- How long do you intend to stay in the home?
- Are you single or in a committed partnership?
- Do you have or are you planning to have children?
- Are you likely to change jobs in the next two years?
- Is your income stable or likely to fluctuate?
- How large will your down payment be?
- What is your credit score?
- Will you need a larger loan than conventional loan limits?
Step 2: Understand Your Lender Options
Knowing where to apply for a mortgage can also help you find the best fit for your needs. There are many options, including:- National or regional banks. These financial institutions operate to make a profit, and as a result, their mortgages may come with more fees than some other options. But banks are also able to offer a variety of loan options, which may be important to you. And their menu of other services could allow for one-stop-shopping.
- Credit unions. These non-profits often charge fewer fees. If you’re looking for the lowest rate possible, getting a mortgage from a credit union may also be a better bet, as they’re known for offering competitive loan terms. You may also find more flexible lending criteria at some credit unions. However, they may offer few choices.
- Mortgage companies. Also known as non-bank lenders, mortgage companies specialize in home loans. In fact, that’s typically all they do. Mortgage-only lenders are good if you want an unusual product, a range of options or competitive terms. Many are also quick, offering preapprovals, closings and fundings within days—especially the digital firms.
Step 3: Prequalify With Your Top Lender Options
Talk to your bank and any other financial institution you have a relationship with because it may offer better rates to existing customers. Many banks award you a better rate if you set up automatic payments from an in-house account. It’s a good idea to ask family and friends for referrals, too.Don’t be shy about reaching out to a mortgage lender by phone or even in person as you shop around. It can be a good idea to speak directly with a loan officer who can assess your financial situation and advise on your best move.
When comparing offers, there are some other things you should consider:
- Mortgage brokers: A mortgage broker may be able to help you secure a great deal on a mortgage. They often work with lenders known as wholesalers, which don’t provide loans directly to consumers.
- Loan cost: Interest rates can be fixed or variable and are determined by market factors and your creditworthiness. The APR, on the other hand, includes the interest rate and fees incurred when borrowing, making it a more complete picture of the actual cost of the loan.
- Closing costs: Closing costs are a bundle of additional fees you’ll need to pay to buy a home. They can account for 2 percent to 6 percent of the home’s purchase price. Lenders typically disclose closing costs on the loan estimate (more on that later). The difference in closing costs might turn out to be more important than small differences in the interest rate.
APR vs. Interest Rate
Your interest rate is how much a lender is charging you to borrow, whereas your APR (annual percentage rate) is your interest rate plus additional lender fees. APR gives you a more complete idea of how much the loan will cost and is more useful when comparing loan costs. https://www.bankrate.com/mortgages/apr-and-interest-rate/Step 4: Compare Loan Estimates
When applying for a mortgage, it’s best to compare at least three lenders, according to the Consumer Financial Protection Bureau (CFPB). This can help you uncover the ideal combination of loan type, interest rate and fees that meets your needs. It can also help you negotiate with a lender you like if you have a lower offer from a competitor.
The loan estimate is an official three-page document that lists several key numbers associated with your loan, including:
- Loan amount
- Quoted interest rate
- Closing costs
- Prepaid interest
- Third-party fees
- Escrow expenses
- Monthly payment estimate
Review Your Loan Estimate
On the loan estimate, keep an eye out for:- Balloon payment: Mortgages with balloon payments have a lower monthly payment (usually only interest) for a set time. 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 upfront money needed to finalize the loan, including outstanding closing costs and prepaids.
Lenders may also 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 approach 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 down the rate,” as the financial pros put it. It’ll take a few years to break even on upfront costs of the points and for your savings to start.
Next Steps for Comparing Mortgage Offers
Shopping for a mortgage is well worth your time, especially if you plan to remain in your home for the long term. Not sure where to start? Check out Bankrate’s mortgage rate tables, which let you plug in general information about your finances and location to receive competitive quotes and tailored offers. Compare your options and read each loan estimate you receive thoroughly to choose the best deal for you.After you’ve compared loan estimates and settled on a lender, apply for mortgage preapproval: a written statement from the lender agreeing in principle to loan you up to a certain amount. Armed with this document—which shows sellers that you have financial resources at your disposal — you can submit an offer on home and negotiate a purchase. From there, you’ll formally apply for the mortgage and undergo the full underwriting process. And then, hopefully, you’ll soon be at the closing table, securing the keys to your new home.
Frequently Asked Questions
- When should I start shopping for a mortgage? It’s a good idea to start shopping for a mortgage before you start house hunting to have enough time to compare rates, get preapproved and better understand your home budget. But don’t start applying for preapprovals until you’re serious about buying a home. That’s because lenders will run a hard credit check to preapprove you, which dings your credit score a few points, and if you aren’t really ready to buy yet, you’ll potentially have dinged your score for nothing.
- How should I shop around for mortgage rates without hurting my credit? To shop around for mortgage rates without hurting your credit, it’s best to limit your search to a window of 14 to 45 days. Any hard inquiries lenders make in this time frame will only count as one.
- Can I negotiate a mortgage offer? Yes, you can negotiate a mortgage offer. Lenders may be willing to lower your interest rate, reduce fees or even offer better terms if you have multiple loan offers and a strong credit score.
- What documents will I need to apply? Gather documents that show your assets, income and debts. In order for lenders to give you the most accurate quote, they’ll need documents like:
- 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
Key Takeaways
- Comparing mortgage offers is crucial, as even a slight difference in the rate lenders offer you can add up to big savings over the life of your loan.
- When you shop for a mortgage, compare APRs and closings costs (not just interest rates) to be sure you’re getting the best deal.
- Determine which type of mortgage you want and request at least three quotes from different lenders to spot potential savings and negotiate better terms.
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