You’ve probably heard how important it is to compare mortgage offers or quotes from multiple lenders. But how do you actually do it? What steps are involved, and what information do you need to obtain from each lender? This tutorial answers these and related questions about mortgage comparison shopping.
How to Compare Mortgage Offers: 4 Steps to Success
This guide is broken down into four steps. These are the steps we recommend taking, in order to effectively compare mortgage quotes from different lenders.
- Gather Information from Several Lenders
- Consider Using a Mortgage Broker
- Review All Costs Associated with the Loan
- Review Your “Loan Estimate” Document
Here’s something that might surprise you. You can obtain a home loan from several different types of mortgage lenders. These include credit unions, large commercial banks like Wells Fargo and Bank of America, mortgage companies, and thrift institutions.
Here’s something else that may surprise you. Different lenders might offer you dramatically different terms and prices, even though your qualifications remain the same. They have different business models and different policies regarding risk. As a result, they price their loans differently.
This is why it’s so important to gather and compare mortgage offers from several different lenders. It’s the only way to be certain you’re getting the best price.
Step 2: Consider Using a Mortgage Broker
Mortgage brokers can help you compare quotes and offers. Brokers don’t lend money directly to consumers. Instead, they help arrange deals with other lenders. You can think of the broker as a “middleman” between the borrower and the lender. He or she tries to match the borrower with the right kind of loan, by gathering offers from multiple companies.
A broker can help you with mortgage comparison shopping by finding a lender for you. They often have access to dozens of lenders and hundreds of loan products. This can give you more options to choose from, and with less effort on your end. It’s a faster way to compare mortgage offers from multiple companies at once.
According to the Federal Reserve:
“Brokers … are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.”
The upside to using a broker is that you’ll have more options to choose from, which helps with mortgage comparison. You could also save a lot of time and energy. The downside is that you might have to pay a broker’s fee, on top of the lender’s origination fee (this should all be disclosed up front, but it’s worth asking about). The broker fee might come in the form of “points” paid at closing, an addition to your interest rate, or both.
If you plan to use a broker to compare mortgage quotes, find out how he or she is compensated. Make sure you factor these fees into the equation, if and when you compare it to other (non-broker) offers.
Step 3: Review All Costs Associated with the Loan
When comparison shopping, be sure to look at the full cost of each mortgage loan. Knowing the monthly payment amount and the interest rate is helpful, but there are other costs to consider as well.
Lender fees, points, and mortgage insurance are examples of “other” costs you might incur. Be sure to compare these mortgage costs, along with the interest rate.
Here are some tips for comparison shopping with these additional costs:
- Rates: Get a list of current mortgage rates from each lender and/or broker. Ask if it’s the lowest rate for that day or week. Find out if it’s fixed or adjustable (the interest rate on an adjustable mortgage can rise over time). Also, ask the mortgage lender about the annual percentage rate (APR). This is a more accurate way to compare mortgage offers, because it includes the interest rate as well as points and fees.
- Points: Discount points are fees you can pay at closing in order to secure a lower interest rate on your mortgage loan. Generally speaking, the more points you pay, the lower the rate you’ll receive. Points are a trade-off. You are essentially paying more up front (at closing) in exchange for a lower rate, which could save you money over the long term. When you compare mortgage offers and quotes, find out if you have to pay points to get the quoted rate.
- Fees: Mortgage loans typically come with a lot of additional fees. Lender fees cover everything from loan origination to processing and underwriting. There are also non-lender fees, such as those paid to home appraisers and title companies. When comparison shopping for a mortgage loan, you’ll need to consider the total cost of these fees. Lenders are required to give you a standard “Loan Estimate” within three business days of your application. This document will help you compare one mortgage offer to another.
I mentioned a “Loan Estimate” in the previous section. This document was created by the Consumer Financial Protection Bureau (CFPB) to help borrowers compare the costs associated with different mortgage loans. It took effect in 2015, replacing the older “Good Faith Estimate” form. The Loan Estimate simplifies and standardizes the way lenders disclose their fees, so that you can compare “apples to apples.”
First-time home buyers and mortgage shoppers are often surprised by the various lending fees that pile up along the way. I mentioned some of these fees above. The Loan Estimate form offers an estimated breakdown of these costs.
It shows other important information as well, such as the loan’s interest rate, prepayment penalties (if any), and estimated monthly payments.
So in addition to helping you compare mortgage offers, it also helps with financial planning and preparation. It’s a very important document, so review it carefully and ask questions about anything you don’t understand.
Locking In Your Rate
So, you’ve compared mortgage offers from several different lenders, and you’ve identified the best loan. What next? If you’re satisfied with the terms being offered, you might want to get a written “rate lock” from the lender. This is also referred to as a “lock-in.”
A rate lock is a written guarantee from a mortgage lender that they will give you a certain interest rate, at a certain price, for a certain period of time. It protects you, the borrower, from interest rate increases that occur while your loan is being processed.
The lock-in should include the rate you’ve agreed on, the length of time the lock-in will last, and the number of points to be paid. Some lenders charge a lock-in fee, while others do not. It varies.
In summary: This article explains how to shop and compare mortgage offers from different lenders. The first step is to gather information that shows the full cost of each loan, including points and fees. This can be done by reviewing the Loan Estimate. A mortgage broker can help you compare loan offers, but you might have to pay an additional fee for their services. So ask up front.