5 Essential Steps to Effectively Compare Mortgage Rates from Multiple Lenders
According to Fannie Mae's surveys conducted in 2014, 2019, and 2021, over a third of homebuyers only obtain a single mortgage quote before purchasing a home. This could lead to significant financial repercussions.
Many buyers underestimate the differences in mortgage interest rates among lenders. Even a minor variation can drastically affect your monthly payments and overall costs. If you’ve already gathered the necessary documents for prequalification with one lender, it’s easy to share them with others as well.
When comparing lenders, it’s not just about the interest rate. You should also assess customer service and closing costs. Additionally, it’s crucial to know whether the lender will service your loan or sell it to another company after origination. If your mortgage is sold, you may end up making payments to a different, potentially less helpful, company in the future.
While securing a low rate is a primary concern for many borrowers, let's explore how to effectively shop for a mortgage in five straightforward steps.
Step 1: Understand Your Mortgage Options
Before diving into quotes, familiarize yourself with the various types of mortgages:
- FHA Loans: These government-backed loans are ideal for first-time homebuyers and those who may not have excellent credit or a large down payment.
- USDA Loans: Available for low- to moderate-income households purchasing homes in rural areas, these loans often require no down payment.
- VA Loans: For eligible military members, veterans, and surviving spouses, VA loans typically offer low interest rates and no down payment.
- Conventional Loans: These loans are not federally insured and can have down payments as low as 3%. Jumbo loans are a type of conventional loan for larger amounts.
Step 2: Gather Multiple Quotes
Reach out to various lenders, including banks, credit unions, and online lenders. You can also ask your real estate agent for recommendations. You’ll typically work with:
- Loan Officers: They work for a specific lender and can help you compare options within that institution.
- Mortgage Brokers: Independent professionals who gather offers from multiple lenders, although they may have a limited selection.
Step 3: Prepare Your Documentation
Collect documents that verify your identity, employment, assets, and income, such as:
- Government-issued ID
- Tax returns
- Pay stubs
- Recent bank statements
Step 4: Get Prequalified or Preapproved
- Prequalification: A simpler process that gives you estimated loan offers based on self-reported information.
- Preapproval: A more thorough process where the lender verifies your information and checks your credit, providing more accurate loan offers. A preapproval letter can strengthen your home offers.
Step 5: Compare Rates and Lock Them In
Once you have several preapproval offers, compare the rates, points, and credits. Points allow you to prepay interest for a lower rate, while credits give you cash upfront for accepting a higher rate. Locking in your rate can protect you from fluctuations, but be aware of any conditions that might affect this.
Conclusion
Shopping for mortgage offers can be daunting, especially with fluctuating rates. However, by understanding your options, gathering multiple quotes, and comparing offers, you can secure a favorable mortgage deal. Freddie Mac estimates that borrowers who shop around can save between $600 and $1,200 annually, making the effort worthwhile.
Stay informed about average mortgage rates and continue to compare offers until you find the best deal for your financial situation.