I Made This Mistake When Getting a Mortgage -- and It Cost Me Thousands

Here's one step you absolutely don't want to skip in the mortgage process.

If you've never been through the mortgage process, it can seem rather intimidating. And to be fair, it can be a stressful time. After filling out a lengthy application, you can expect to spend hours tracking down and uploading documentation about your income, employment status, assets, and more.

Because of all the stress involved, it can be easy to forget that at the end of the day, mortgage lenders are selling loans to you. You're a customer for their product, just as if you were buying furniture in a store. And just like any other shopping transaction, it can pay to shop around -- a principle that far too many first-time home buyers overlook.

Why shopping around makes such a difference

The first time I bought a house, I had no idea there was any need to shop around for a mortgage. I simply did what many first-timers do -- I filled out one mortgage application with my real estate agent's "mortgage guy," accepted whatever rate I was quoted, and bought a house.

However, mortgage lenders do not all have the same interest rates. If you obtain quotes for a 30-year fixed-rate mortgage from five different lenders, you're very likely to get five slightly different rates.

When you're talking about mortgages, a slightly different rate can make a bigger difference than you might think. Consider this example. Let's say you're buying a home for $400,000 and are putting 20% down, so you need to borrow $320,000. Your real estate agent's preferred lender offers you a rate of 5.125% on a 30-year loan, while another lender approves you for 5%.

At first glance, this might seem like a tiny and negligible difference. But it's not. The higher rate has a $1,742 monthly principal and interest payment, while the lower rate's payment is $1,718. But remember, a 30-year loan has 360 monthly payments. That $24 difference each month will add up to $8,640 in additional interest over the loan's term. That's why it's so important to shop around.

Wait -- won't all these mortgage applications hurt my credit?

You may have heard that filling out too many applications for credit, and too many lenders pulling your credit file, can hurt your credit score. And generally speaking, it's true. For example, if you apply for a new credit card this week, then another one next week, and another one the week after that, it can certainly have an impact on your credit score.

However, there's a special exemption specifically designed to allow consumers to shop around for the best interest rates on loans. As long as all of your credit inquiries occur within a "normal shopping period," which is defined as two weeks by most versions of the FICO credit scoring formula, they will count as just one credit application for scoring purposes.

In a nutshell, aside from taking up a few hours of your time, there's really no good reason not to shop around for a mortgage.

The bottom line

The best course of action as a home buyer is to make a short list of 3-5 mortgage lenders that meet your needs (Note: Our top mortgage lenders page is a good place to start.) And then, request a rate quote from all of them. To be sure, it can take a solid afternoon of your time to fill out all of those applications, but for thousands in potential savings, it can be well worth it.