Shopping for the best price can be a pain in the neck. Life is busy, and there isn’t always time to carefully compare every product and get the best deal, and for the typical grocery store purchase, the amount of money you might save isn’t worth the amount of time you lose. When it comes to shopping for a home loan though, the stakes are higher, and the time spent shopping may save you thousands of dollars, which is definitely worth your time. Read on to learn why and how to rate shop!
The Savings
Let’s start with the why – it’s pretty simple. You can save a lot of money by shopping for the lowest interest rate. Let’s throw around some hypothetical numbers. Suppose you want to get a 30 year fixed rate mortgage for $250,000. You contact 3 different lenders and get rate quotes from each, which come back to be 3.5%, 4%, and 4.5%. The difference between these numbers seems small, only ½ of a percent separates each of them, but the real difference is in your monthly payments and the cost of the interest over the life of the loan. If you follow the amortization schedule given to you by your lender, a $250,000 30 year fixed rate with an interest rate of 4.5% would result in a monthly P&I (Premium and Interest) payment of about $1,267, and the total cost of the interest after 30 years is about $206,000. If we use the lower interest rate, 3.5%, your monthly payments drop to about $1,123, and the total cost of interest drops to $154,000. Wow, that’s more than $50,000 of savings! Shopping around for the best interest rate can help you get the best deal, which can really pay off in the long run.
It’s also good to note that different lenders charge different fees. So say you have two rates that are about the same – look at the APR (Annual Percentage Rate)! Which is higher? APR refers to the annual cost of a loan as a percentage of the loan, and includes any fees the lender may have charged, which the interest rate doesn’t. A higher APR could mean that even though the interest rate of the loan may seem comparable to another offer, a, the total amount you spend over the term of the loan is more. It’s not a black and white situation, so do some research or talk to a mortgage professional to learn more about how APR factors in to loan cost.
Rate Shopping
The first step when rate shopping is to make sure your credit is in order. You’re able to get a free copy of your credit report with no impact on your credit score from each of the three credit bureaus once per year if you ask for it, so ask for it! Examine your credit report for any errors or incomplete information. You should check out your credit report at least 6 months before shopping for a loan so that you have time to fix any mistakes and work on repairing your credit score if it’s needed.
Next, look at multiple sources for interest rate quotes – banks, brokers, and online lenders may each return different results. Each time you request a rate quote from a lender, it results in the lender pulling your credit report. Usually, when there are a large number of inquiries on your credit report within a short period of time, it indicates that you might be a credit risk, and can lower your credit score. Typically, a single inquiry will only take 5 or less points off your credit score, but that can add up after a while. Fortunately, it’s a little different with mortgage rate shopping. Current regulations protect mortgage applicants who are searching for the best rate. If you focus your rate shopping to a short period of time, between 15-45 days, all the separate inquiries made by the different lenders you’re shopping with will be counted as a single inquiry. This way, you can shop around without fear of seriously damaging your credit.
Having an idea on what you’re hoping to achieve with your home financing is ideal. Do you want to lower you monthly mortgage payment? Do you want to buy an investment property? Perhaps you want to pay off your home mortgage faster. Sharing these goals with your Mortgage Loan Originator is important so they can offer you the appropriate loan program and corresponding interest rate. Recognize that on any given day, for a specific loan product, different lenders will provide different rates as these fluctuate daily depending on the market. Because everyone has a unique credit history, and different lenders offer different loan programs, some may be willing to make more attractive concessions. This is why rate shopping is so important
Other factors to consider
It’s also important to remember that while you do want the best deal possible, that doesn’t always mean the lowest interest rate possible.
- You may be able to pay “points” or other fees on your loan at closing in exchange for a lower interest rate, but sometimes these fees can actually cost much more in the short term than they appear to save
- A 15 year fixed rate mortgage could have a higher interest rate than a 30 year fixed rate mortgage and still be saving you money in the long term since you are making payments for half the amount of time
- Adjustable Rate Mortgages might appear attractive because of their low initial interest rates, but they may not the right option for you if you are planning on staying in your home long term. Be sure to carefully consider the different loan types.
AND above all, don’t forget, customer service is incredibly important. Be sure you’re working with someone who knows what they’re doing, and can do it with a smile. If someone offers a great deal, but seemingly doesn’t know what they’re doing or has poor communication skills, that slightly better deal might not be worth the extra hassle and pain that may come during the home loan process.
In the end, you might lose a little bit of time by shopping, but that’s nothing compared to the thousands you can save in the long run by getting yourself the best mortgage interest rate possible. To start shopping with OneTrust Home Loans, give us a call at 877-706-5856. Our highly skilled Mortgage Loan Originators are looking forward to helping you reach your home financing goals!