Published in: Mortgages | Aug. 8, 2020
You might be surprised how much you can save by shopping around.
There are several factors determining how much you'll pay each month for your mortgage. The most obvious is the size of your mortgage, but other factors such as your credit score, the type of home you're purchasing, and the loan-to-value (LTV) ratio of your mortgage also come into play.
There's one more big factor that gets overlooked far too often -- the lender you choose. In this article, we'll discuss the benefits of rate shopping, why there's no reason not to shop around, and how much you might save.
When many people apply or get pre-approved for a mortgage, they do so with just one lender. Sometimes it's the bank they already have a relationship with, and sometimes it's an online mortgage lender with a reputation for low rates.
But which of those produces the best loan terms?
9 in 10 Americans can qualify to refinance their mortgage. With mortgage rates plummeting to multi-decade lows, there's no better time to cut your monthly mortgage payment.
Trick question. Unfortunately, neither is the best approach 100% of the time. That's why it's so important to rate shop.
Mortgage rates aren't standardized, meaning that while they tend to move in response to market conditions, each lender sets its own mortgage rates and has its own methodology for evaluating a borrower. To make a long story short, it's entirely possible for the same borrower to get offered significantly different mortgage APR from two lenders.
Therefore, when applying for a mortgage, it's smart to apply with several lenders. I often suggest applying with about five, including several different types, such as a large national bank, a local financial institution, a credit union, and an online-based lender. Sure, it'll take you a few extra hours to do this, but as we'll see, the extra time can save you tons of money.
You may think that while shopping around for the best rate sounds good in principle, it could be devastating for your credit. That's not true.
It certainly is true that applying for new credit can be a negative factor in your credit score. For example, if you apply for five credit cards within a week, it could drop your score.
However, there's a rule in the FICO credit-scoring formula that is specifically designed to encourage rate shopping. Simply put, if all of your applications for a certain type of installment loan like a mortgage or auto loan take place within a normal shopping period (defined as two weeks in most versions of the FICO formula), they will count as a single inquiry for scoring purposes.
In other words, as long as you do all your applications within a couple weeks, it doesn't matter whether you apply with one mortgage lender, five lenders, or fifty. It will have the exact same impact on your credit score.
Let's put some numbers behind the idea of rate shopping to show why seemingly small differences in interest rates can be worth the time.
We'll say you're planning to buy a $300,000 home, and that you want to put 20% down on a 30-year fixed-rate mortgage. One lender offers you an APR of 3.1%, while another offers you 3.0%. This may not sound like a huge difference, but you might be surprised to learn that this tenth of a percentage point would save you nearly $4,700 over the term of your 30-year loan. I'd say that's worth the extra time it takes to shop around.
Chances are, mortgage rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase. Click here to get started by scanning the market for your best rate.
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