Let’s be real: Shopping around for a mortgage is about as enjoyable as applying for multiple jobs. Both involve a lot of paperwork, time and back-and-forth communication. You may never hear back from all (or any) of those job prospects, but you’re likely to reap rewards by shopping for mortgage rates with a handful of lenders.
To put this mortgage shopping savings theory to the test, Freddie Mac conducted a study last year to find out how much money borrowers potentially leave on the table when they don’t shop around.
For a typical $250,000 mortgage, a borrower who gets one extra rate quote saves an average of $1,435 over the life of the loan, with 80 percent of those borrowers saving between $966 and $2,086 by shopping one additional lender, Freddie Mac reported. The more you shop around, the more savings you rack up. Borrowers who get five rate quotes save $2,914 – on average – with 80 percent of those shoppers who get five quotes saving between $2,089 and $3,904.
While a few thousand dollars may not seem like much spread out over a 30-year mortgage, consider this: Many homebuyers struggle to save enough cash to cover their down payment and/or closing costs. Saving $3,000 over the course of a mortgage because you shopped around can equate to two months’ of mortgage payments.
The case for shopping around
Getting rate quotes from more than one mortgage lender means that consumers are more likely to get a better interest rate and save money now and in the long term, says Doug McManus, director of financial research at Freddie Mac.
“With lower monthly payments and lower fixed fees, the loan will be more affordable and, thus, safer,” McManus says.
The legwork involved in rate-shopping can be daunting. A mortgage broker can do the work for you, or you can visit multiple lenders on your own to do the research. Many lenders provide free rate quotes online or by phone after you’ve provided a few details, such as your credit score range, loan amount, term (length of your loan) and the loan type you’re interested in. You can also check out Bankrate’s mortgage tool, which allows you to see rates from multiple lenders who offer home loans in your area.
To get a solid rate offer, however, you have to get preapproved for a mortgage with each lender. When you apply for a mortgage, a lender thoroughly vets your income, finances, employment and credit to determine how much you can borrow and what interest rate you qualify for.
With home prices still rising, it’s better to minimize your costs as much as you can on the borrowing side – and shopping around for a mortgage is the best way to do that.
“Consumers may have hundreds or thousands of dollars more in their pockets. Not a bad return for a few phone calls or clicks,” McManus says.
Saving money is just one of the benefits
Nabbing a lower interest rate and lower payment over the life of your loan is a big win. But it’s not the only reason it pays to shop around.
By comparing lenders, you’ll see variations in lender origination fees, points, mortgage insurance premiums and third-party fees. You’ll also get a sense of how long it takes lenders to close a loan, how well they communicate and their customer service philosophies.
It’s natural that most homebuyers want to get the lowest rate possible, but they shouldn’t ignore these other nuances when choosing a lender, says Joe Zeibert, senior director of products, pricing and credit for Ally Home.
When you get loan estimates from different lenders, pay close attention to the fees, Zeibert advises. If one lender charges higher fees than others, ask the lender to clarify what the fees are for and if they can be negotiated.
Shopping with a variety of lenders – big banks, credit unions, online lenders and regional banks, and a mortgage broker – helps you compare who’s charging what. You also get a sense of what kind of customer service you’ll receive, based on how smoothly the communication goes and how your lender processes loan applications.
What you’ll pay in mortgage points (also called “discount points”) is another reason it’s worth getting more than one rate quote. Points are an up-front fee borrowers pay to buy down the loan’s interest rate. One point equals about one percent of the loan amount, and lenders structure their points differently.
Some cash-strapped buyers who want to minimize out-of-pocket closing costs may prefer a slightly higher interest rate in order to avoid paying points at all, especially if they don’t plan to stay in their home long. But if you want to stay put for the long haul, shopping around to find a lender that offers the right mix of affordable rates and discount points can save you thousands, Zeibert says.
Finding the right mortgage may be just as important as finding your dream home. You don’t want to risk leaving thousands of dollars on the table because you didn’t bother to shop. Don’t forget that choosing a mortgage is a long-term relationship, Zeibert says.
“It’s complicated,” Zeibert says of the mortgage process, “so you want to work with someone who’ll hold your hand in the process – and not just go where you’ll get the cheapest discount. You might refinance or buy another home in the future, so you want to work with people you can trust.”
By Deborah Kearns, Bankrate.com. Visit Bankrate online at bankrate.com.