The Consumer Financial Protection Bureau reports that nearly half of all mortgage borrowers don’t shop around when they buy a home. The translation is that they choose the first lender they meet for what is probably the biggest purchase of their life. Around seventy-seven percent of borrowers only apply to a single lender when shopping for a mortgage. Instead, they should be filling out applications with multiple lenders or brokers. You probably look for the best deals on things like phones, TVs, and other electronics by comparing various retailer prices. Why wouldn’t you do the same to find the best rate and lowest cost on your mortgage? Not doing so could cost you big bucks in the long term.
It might seem natural to want to keep all your financial dealings with one financial institution, especially if you’ve used the same bank for many years. Certainly you’ll want to check out your bank’s mortgage rates and products, but don’t assume that your years of loyalty or familiarity will mean you’re getting the best deal that can be found. Here’s a list of reasons shopping around for a mortgage makes sense.
Lenders offer different interest rates. Lenders frequently advertise their interest rates and you’ll find that they usually vary by around a half of a percent. That little half percent adds up quickly when you do the math. Let’s look at a home that costs $300,000, for which you put down twenty percent and pay a three percent interest on a 30-year fixed rate. Your monthly payment will be around $1,012 per month. Now let’s consider the same type of mortgage that has a 3.5 percent rate. Now your monthly payment will be around $1,078 per month. A sixty-six dollar difference per month adds up to $3,960 more in interest you’ll pay in the first five years. That’s close to $24,000 more in interest you would pay for the life of the loan.
Lenders offer a range of programs. Because each lender offers a range of loans that you can choose from, it’s best to pick someone who can map out the pros and cons for you. You want to choose the option that best suits your individual financial needs. Someone planning to stay in a home for ten or more years might be better off with a conventional fixed rate loan. While someone who only wants to stay put for three to five years might save more money with a 15-year loan or an adjustable rate mortgage (ARM). A knowledgeable lender will help you calculate your costs and make suggestions. Ask a lot of questions and make sure you understand the answers.
Lenders charge a range of fees. Most lenders have a long list of fees they charge for their services. Some of these might include a loan application fee, loan lock fee, loan origination fee, title insurance fee, and others. Compare all of these fees with other lenders’. Sometimes a lender will negotiate on fees in order to get your business, so ask what can be dropped or lowered if you know you can net better somewhere else.
Lenders run specials. Because lenders are competing with each other just like any other business, they often run specials. They might offer to pay for closing costs or offer faster processing. If you have an FHA loan, you may need a lender who offers to fold in closing costs with the loan. But beware of teaser introductory rates. For example, if you are being sold on a three percent ARM for five years, you need to fully understand how high that rate could go when five years have passed. If your lender doesn’t fully explain costs for the life of the loan, you need to look elsewhere. Don’t stick with a lender who appears to be hiding details from you.
Lenders have different standards for their borrowers. Lenders differ in who they approve as a customer from a financial standpoint. For some, a blemish on credit history could automatically mean a denial for a loan. An institution with a different standard might approve the same person because of their otherwise stellar financial record. If one institution turns you down or doesn’t offer you a good rate, try another one.
You could gain bargaining power. If you have a good faith estimate from more than one lender, you have a frame of reference for what is a good deal and a bad deal. It’s also a way for you to show your lender that you’ve done your homework, are aware of what deals you’re qualified for, and you’re able to give someone else your business.
Do plenty of research before choosing a lender. This means knowing your own credit score and financial history, knowing available interest rates, and shopping around for your mortgage. Visiting just three lenders could save you thousands of dollars over the years you own your home. This allows more savings for you to pay off other debts faster, pay for home repairs, and make more improvements to your home in the future.