If you want to get the best mortgage rate, you HAVE to compare quotes from several mortgage lenders. According to researchers at Stanford University, simply obtaining at least four quotes from competing mortgage lenders can save you thousands. In 2012, they discovered that borrowers taking out a $200,000 mortgage saved a median $2,664 when they got four quotes instead of one or two. Mortgage quotes are easy to get online, so why wouldn’t you spend a few minutes to save thousands of dollars?
The Right Way to Compare Mortgage Quotes
There are a few rules to follow when you contact lenders and ask for mortgage quotes. If you don’t follow these guidelines, the information you receive may be useless.
- Get your quotes at the same time. Try to get them as close to simultaneously as you can. Mortgage rates are determined by movements in financial markets, just like stock prices and bond yields. You wouldn’t expect a stock price quote from 8 am on Monday to be good at 3 PM on Friday, would you? It’s the same with mortgage rates — they can change throughout the day.
2. Give every lender you contact the same information. You’ll need to provide an estimate of your credit score (don’t let lenders pull your credit until you know that you want to do business with them), the home sales price (or property value if you’re refinancing), desired loan amount, property type (single family, condo, manufactured home, etc.) and use (primary residence, rental, vacation home).
3. Ask for Good Faith Estimates (GFEs). While lenders are not required by law to give you one until you actually apply for a mortgage, many are willing to supply them to consumers who are still shopping for their loans. GFEs allow you to see the interest rate and costs of a mortgage and compare it to competing offers. Some lenders prefer to provide “loan scenarios” or “worksheets,” which may be perfectly fine, or they may be ab attempt to avoid the consumer protections that are only provided by a GFE.
4. Understand the limitations of an APR disclosure. APR, or annual percentage rate, must be disclosed by lenders when they advertise an interest rate. The APR incorporates not just the interest charged but also many of the fees associated with the loan. It’s supposed to help you decide between, say, a 4,25 percent loan with zero fees and a 3.75 percent loan with $5,500 in fees. However, APR has many shortcomings, especially if you don’t keep the loan long enough for a lower payment to offset higher upfront fees.
Easy Way to Choose the Best Mortgage Deal
Here’s an easy way to sort through confusing arrays of interest rates and fees. Take a look at the example below, and then work through your own loans using the calculator on this page.
Suppose you get three mortgage quotes and are trying to choose the best deal to buy a $400,000 home with a $320,000 loan. Here are the offers:
- Loan A: 4.125 percent, zero points, $500 in fees
- Loan B: 3.875 percent, one point, $1,000 in fees
- Loan C: 3.75 percent, two points, $0 fees
(One point is one percent of the loan amount.)
The chart below shows what each loan’s fees and payments will look like.
You’ll want to determine how long it would take for the extra cost of the lower rate to be offset by its lower monthly payment. For example, Loan B costs $3,700 more than Loan A ($3,200 in points plus $1,000 in fees, minus $500 for Loan A’s costs). Its monthly payment is $46.12 less. Dividing $3,200 by $46.12 equals 80 months, which is just over 6.5 years. Loan C’s costs are $5,900 more, its payment is $68.91 less, and it would take nearly eight years to cover the added costs with the lower payment. If you don;t expect to keep your home longer than a few years, the lower cost loan makes sense, even if it has a higher rate.