(Updated 11/29/24)
Welcome, future homeowners! One of the most critical steps in buying a home is securing a mortgage, yet nearly half of homebuyers make a costly mistake—they settle for the first offer they receive. According to the Consumer Financial Protection Bureau (CFPB), almost 50% of buyers only consider a single lender when shopping for a mortgage. Let’s explore why shopping around matters and how you can navigate the process like a pro to save thousands of dollars.
Why Shopping Around Matters
Savings Add Up
Comparing mortgage offers can save you significant money over the life of the loan. Freddie Mac reports that borrowers who obtain at least one additional rate quote save an average of $1,500, while getting five quotes can result in average savings of $3,000 or more.
Understanding the Real Cost
Mortgages aren’t just about the interest rate. The Annual Percentage Rate (APR), lender fees, and loan terms all impact the total cost. Taking time to evaluate these factors ensures you’re making an informed decision.
What to Consider Beyond the APR
1. Interest Rates and APR
- Interest Rates: This is the cost of borrowing money, expressed as a percentage. Lower rates mean smaller monthly payments.
- APR: The APR includes the interest rate and other costs, like origination fees and discount points. It provides a more comprehensive view of the loan’s true cost.
2. Lender Fees and Closing Costs
- Origination Fees: Charged by lenders for processing your application, these can vary widely.
- Discount Points: Optional fees that lower your interest rate; one point typically costs 1% of the loan amount and reduces the rate by about 0.25%.
- Closing Costs: Covering expenses like appraisal fees, title insurance, and attorney fees, these costs range from 2% to 5% of the loan amount.
3. Customer Service and Lender Reputation
- Service Quality: Choose a lender who is responsive, transparent, and helpful. A good relationship can make the process smoother.
- Reputation: Research online reviews and seek recommendations from trusted sources, like friends or real estate agents.
4. Loan Types and Terms
- Loan Programs: Different lenders offer various programs, including FHA, VA, USDA, and conventional loans. Each program has unique requirements and benefits.
- Loan Terms: Decide between a 15-year or 30-year term. Shorter terms usually mean higher payments but less interest paid overall.
5. Mortgage Portability and Servicing
- Servicing Rights: Understand if your loan will be serviced by the original lender or sold to another company.
- Portability: If you plan to move soon, a portable mortgage can allow you to transfer the loan to a new property.
6. Prepayment Penalties and Flexibility
- Prepayment Penalties: Some loans charge a fee for paying off your mortgage early.
- Payment Options: Flexible payment schedules, like bi-weekly payments, can help you pay off the loan faster and reduce interest costs.
Steps to Shop Around Effectively
1. Get Pre-Approved
Start by getting pre-approved with multiple lenders. This shows sellers you’re serious and gives you a clearer picture of your borrowing power.
2. Compare Loan Estimates
Each lender will provide a Loan Estimate form detailing the loan’s terms, costs, and conditions. Use this standardized document to compare offers side by side.
3. Negotiate Terms
Don’t hesitate to negotiate. If one lender offers better terms, ask your preferred lender to match or beat the deal.
4. Consult a Mortgage Broker
A mortgage broker can shop multiple lenders on your behalf, potentially finding deals you wouldn’t access on your own.
5. Read the Fine Print
Carefully review all terms, including hidden fees and servicing details, to avoid surprises later.
The Financial Impact of Shopping Around
Real-Life Example
Imagine you’re borrowing $300,000 for a 30-year mortgage:
- Lender A offers 6.5% interest with $4,500 in closing costs.
- Lender B offers 6.0% interest with $6,000 in closing costs.
While Lender B has higher upfront costs, the lower interest rate saves you about $30,000 over the life of the loan. Shopping around ensures you don’t leave such savings on the table.
Conclusion: Empower Your Mortgage Journey
Securing a mortgage is one of the most significant financial decisions you’ll make. By shopping around, comparing offers, and understanding the full cost of a loan, you empower yourself to make the best choice for your future.
Don’t settle for the first offer—explore your options, negotiate, and consult with trusted professionals. The extra effort can lead to substantial savings and a smoother homebuying experience.
