When shopping for a mortgage or auto loan, too many buyers simply accept the first loan offered. They figure that if their real estate agent's "mortgage guy" or car dealer's "finance guy" gives them an interest rate, then that's what they have to pay.
Nothing could be further from the truth. It is crucial to shop around for the best interest rates, even if all the lenders you talk to offer rates aren't that far apart. Here's what a small difference in interest could mean to your wallet, and how to find the best deal.
A little goes a long way
Let's say you apply for a $250,000 30-year mortgage and that your lender's mortgage broker offers a 4.1% interest rate. After shopping around, the lowest rate you can find with the same fees is 4%. Does the 0.1% really make a difference? Yes!
These mortgages would produce monthly principal and interest payments of $1,208 and $1,194, respectively. While this might not seem like a huge difference, the lower monthly payment adds up to a savings of more than $5,000 over the life of the 30-year loan.
You might find even bigger "spreads" between the rates on offer, and the savings can really add up. Consider the savings with some of these interest rates, compared to our 4.1% example.
| Interest Rate | Monthly Payment | Total of 360 Payments | Savings vs. 4.1% Rate |
| 4.1% | $1,208.00 | $434,880 | $0 |
| 4.05% | $1,200.76 | $432,274 | $2,606 |
| 4% | $1,193.54 | $429,674 | $5,206 |
| 3.95% | $1,186.34 | $427,082 | $7,798 |
| 3.9% | $1,179.17 | $424,501 | $10,379 |
| 3.85% | $1,172.02 | $421,927 | $12,953 |
| 3.75% | $1,157.79 | $416,804 | $18,076 |
Interest rate differences have a somewhat lesser effect on auto loans, simply because of the shorter loan lengths, but the savings can still be significant. For example, on a $25,000 72-month auto loan, the difference between 5% and 4.5% interest means more than $415 in savings. And who couldn't use that extra money?
Wait, won't this hurt my credit score?
As long as you do your comparison shopping within a certain time period, there will be no difference in the effect on your credit score. Inquiries can indeed ding your credit score, but there are special rules intended to encourage rate-shopping.
Depending on which version of the FICO scoring formula a lender uses, any inquiries for the same type of loan (mortgage or auto) within a "typical shopping period" will count as a single inquiry for credit scoring purposes. With older versions of FICO, the window is 14 days, while newer versions offer a more generous 45-day window to shop around. In other words, even if you contact 20 mortgage lenders in a week, and all of them pull your credit, it will only count as one inquiry when your credit score is calculated.
Where to shop for a loan
Now, it's not really practical to get a thorough loan quote from every possible lender, but you at least want to check several different types of lenders.
In addition to the "mortgage guy" or "finance guy," you should apply for a rate quote at a big national bank (like Wells Fargo or Chase), a regional bank, a local bank, a credit union, and (for mortgages) an independent mortgage lender or two, such as Academy Mortgage.
You never know where you'll find the best rates. A regional bank offered the best rate when I bought my first home, but an independent lender delivered the best rate for my current home. So it definitely pays to try a few.
Is one long day of mortgage applications worth it, if it can save you thousands of dollars? I certainly think it is.
