As a homebuyer, when you hear the word “shopping,” you probably think of open houses, private showings, and endlessly browsing listings on your favorite real estate sites. What you probably don’t think about is mortgage rate shopping, or the steps you’ll need to take to compare mortgage rates.
Are we losing you? Before your eyes glaze over and you furiously click out of this tab, hear us out!
Mortgage rate shopping is one of the best and easiest ways to save money on your home purchase. And doing it puts you way ahead of the curve — only half of homebuyers compare rates!
According to research by Freddie Mac, just one extra call for an additional rate quote could save you $1,500 throughout the life of your mortgage loan repayment. Getting five quotes could save you around $3,000 during repayment, or knock an average of 0.166% off your rate.
And who doesn’t want to save money on their mortgage?
We spoke with two real estate experts — top Texas agent Jeremy Larkin, and HomeLight mortgage sales leader Richard Helali — to walk you through how to compare mortgage rates.
Here’s what you need to know.
What are mortgage rates?
“The mortgage rate is the rate of interest you pay on the outstanding balance for your mortgage,” Helali explains.
Your mortgage rate is one of the most important factors when it comes to affordability and how much you’ll pay for your mortgage over time. That’s why it pays to rate-shop.
How are mortgage rates determined?
But let’s back up a minute: how does a lender determine what rates to offer which borrowers? This can be difficult to assess as a buyer; rates are incredibly complex! But there are three major prongs to keep mind:
- The lender looks at all kinds of economic data to help set their base rates.
- They also examine each individual buyer’s credit score and finances to determine the risk level of the loan, and they methodically adjust the base rate according to that risk.
- Finally, the major details of the home purchase — such as the type of loan, how much you put down as a down payment, and interest you choose as the borrower — will also affect the rate you’re offered.
1. Economic data
There are multiple economic factors that go into setting mortgage rates that are outside of the buyer’s control, such as:
- The state of the economy
- The current Federal Reserve Funds Rate
- What’s happening in the secondary mortgage market (that’s where loans get packaged together and resold to investors, so lenders can turn around and make more loans)
Lenders consider a variety of economic data points and set their mortgage rates accordingly. They have to remain competitive enough to attract buyers, yet still turn a profit.
That’s why lenders offer such different rates: they’re each running the numbers and deciding what’s best for their own business.
And that’s also why it’s crucial to compare lenders. They may have their reasons for charging a higher rate, but that doesn’t mean you need to pay more for your mortgage.
2. Your financial profile
The rate you’re personally offered on your mortgage loan depends on your individual qualifications as a buyer, such as:
- Credit score
- Savings and how much you’ll put down as a down payment
- The debt load you already carry
These factors signal to lenders how much risk they’ll have to take on to lend you a large sum of money, and this is the part you can control when you’re ready to buy a home.
“Your credit score and the down payment percentage are going to be the main driving factors to determine what your rate is,” Helali shares.
A higher credit score and larger down payment will get you a lower rate, and therefore a cheaper mortgage. A lower credit score and smaller down payment will get you a higher rate, and an overall more expensive mortgage.
Basically, the more risk the lender takes on to back your purchase, the higher rate you’ll pay.
3. Details of the home purchase
As if that wasn’t complicated enough, there are a few other major factors that affect your rate, and they revolve around the details of your home purchase. Let’s walk through them.
Type of interest
There are two main types of mortgage interest: fixed-rate interest, and adjustable-rate interest.
With fixed-rate interest, your rate remains the same throughout the life of the loan, as do your monthly mortgage payments. If you plan to stay in the home for a longer period of time, lenders typically advise fixed-rate interest — especially in the low interest rate environment we’re seeing today.
With adjustable-rate interest, you start with a lower introductory interest rate. Then after a certain period of time — typically five, seven, or ten years — your rate adjusts to the market rate.
If you don’t plan to be in the home too long, an adjustable-rate mortgage might make sense. But if you plan to stay put for several years, this type of interest can be a bit riskier. That’s especially so in a low-interest-rate environment, since your rate could go up significantly when the time comes to adjust.
Another factor that affects your mortgage rate is the loan term. Shorter-term mortgages have lower rates, and longer mortgage terms have higher rates. That is to say, a 15-year loan will have a lower rate than a 30-year loan, and you’ll pay far less interest over the life of the loan.
But understand that with a shorter loan term, your monthly payments will be higher because you’ll be paying the loan off more quickly.
Let’s look at a quick comparison. Say you’re taking out a loan for $250,000.
15-year mortgage costs:
- Mortgage rate: 3.2%
- Monthly payment amount: $1,751
- Total cost of the mortgage: $315,109
30-year mortgage costs:
- Mortgage rate: 3.8%
- Monthly payment amount: $1,165
- Total cost of mortgage: $419,362
With this example, we can pretty easily see how the loan term — and the rate that goes along with it — can make a big difference to your bottom line.
Type of mortgage
The type of mortgage you get also affects the rate you’re offered. Some loan types have stricter buyer qualifications and offer lower rates, while others are more accessible to lower-credit buyers, but they carry higher rates to cover the lender’s risk.
Conventional loans are loans that are not backed by the government.
Conventional loans tend to offer some of the most competitive rates available because they tend to be lower-risk loans, but they also have relatively strict qualifications for the same reason.
- Minimum credit score: 620, though many lenders will require higher scores
- Minimum down payment: At least 3% for qualified buyers, 5% for most buyers
- Mortgage insurance: Required for those putting down less than 20%
- Rates: Competitive
- Best for: Buyers with strong credit
These loans are — you guessed it — backed by the U.S. government, and they have varying terms depending on the program.
VA loans are backed by the U.S. Department of Veterans Affairs, and they’re available to active military service members, veterans, and qualifying surviving spouses.
They have favorable, money-saving features for those who qualify, including the ability to put zero down on the house and still avoid mortgage insurance.
- Minimum credit score: 620, though it’s not a hard minimum, and some lenders will go lower
- Minimum down payment: 0%
- Mortgage insurance: Not required (though there is a funding fee of 0.5%)
- Rates: Lower than conventional
- Best for: Anyone who qualifies for a VA loan would be hard-pressed to find a better deal out there
FHA loans are backed by the U.S. Federal Housing Administration, and they’re geared toward buyers with lower credit scores who may not be able to qualify for a conventional loan.
- Minimum credit score: 580, though some lenders may require higher
- Minimum down payment: 3.5%
- Mortgage insurance: Required if you put down less than 20% (note that this is some of the most expensive mortgage insurance out there — and the hardest to get rid of — especially if you put down less than 10%)
- Rates: Higher than conventional
- Best for: Buyers with distressed credit who don’t qualify elsewhere
USDA loans are backed by the U.S. Department of Agriculture and they’re meant for rural, lower-income buyers (there are income limits) with relatively strong credit.
- Minimum credit score: 640, though some lenders may require higher
- Minimum down payment: 0%
- Mortgage insurance: Required for less than 20% down, plus a funding fee
- Rates: Often lower than conventional
- Best for: Rural buyers who meet income and credit requirements
Loan size can also play a role in your mortgage rate.
Those who get non-conforming loans (known as jumbo loans, meaning they exceed the lending limits set by the FHFA, or Federal Housing Finance Agency) typically have to pay higher rates to cover the risk to to the lender.
In most markets, a jumbo loan is any loan that exceeds $548,250, but in some more expensive markets, the FHFA limits can be as high as $822,375.
Another thing to note with jumbo loans is that they often require a higher minimum down payment, with many lenders asking for at least 10% or more down.
Finally, the type of property you’re buying can significantly impact your rate.
Primary residences carry the lowest rates because they present the least risk to the lender.
Think about it this way: You need shelter, so you’re probably going to do anything you can to pay your mortgage and stay in your home. And if something breaks or is damaged in the house, you’re presumably living there full-time, so you’ll probably notice and fix it, protecting everyone’s investment.
Secondary residences (in other words, a vacation home that’s primarily used by you) have higher mortgage interest rates.
And finally, investment properties (those you’ll use to make money, such as rental units or home flips) carry the highest mortgage rates.
Other property types, like multiple-unit properties and mobile homes, can also have their own specific rates and down payment requirements. So be sure to check with lenders for more information if you’re going this route.
How to save money on your mortgage by comparison shopping
Okay, by now you’ve got a pretty good idea of how rates work, but how do you actually shop for them? We’ve got you covered! Just follow these six simple steps.
Step 1: Connect with a lender to make sure you’re mortgage-ready
Rate shopping is all well and good, but first you need to make sure you’re ready to get a mortgage at all.
“You don’t want to put the cart before the horse. Step one, before you start any buying process, you need to connect with a mortgage lender,” Larkin explains.
“And that’s so you can get educated, understand what your buying power is, understand what your down payment requirements are going to be.”
For this step, it’s not important which lender you choose, as you’ll figure out who you want to work with later on in the process.
What is important is that you determine your credit, income, savings, and debts are in a place where you can get a mortgage — and that you have an idea of how much home you can afford — so you can start comparison shopping.
Step 2: Get several rate quotes from different lenders
Here’s something many homebuyers don’t realize: You can get a rate quote without applying for a mortgage. And it only takes about two minutes!
What’s a rate quote?
A rate quote is pretty much what it sounds like: A lender quoting you a mortgage rate based on self-reported information. Because they’re self-reported, rate quotes aren’t always accurate, and they’re subject to change when the lender actually verifies your information.
Still, rate quotes are a valuable tool for rate-shopping and comparing lenders.
How to do it
To get a two-minute rate quote, simply contact the prospective lender and provide them with the following information:
- What kind of property are you looking for (primary residence, secondary residence, or investment property)
- The home’s purchase price
- Your down payment amount
- Your estimated credit score — the more accurate, the better!
Some lenders will send a rate quote by email, some will provide you a closing cost worksheet, and some may even give you a Loan Estimate (though according to Helali, this last option is pretty rare).
However, it’s important to understand that without all the relevant information, your rate quote will be based on lender assumptions — and therefore the quote may change when you actually apply for the loan and they verify your information.
For example, let’s say you get a rate quote and tell the lender your credit score is 750. But when you apply and they run your credit, your actual score is 680. This difference would affect your rate pretty significantly.
Still, Helali believes rate quotes are a great way to compare the relative costs of lenders without having to go through the full mortgage application process.
He says that even if your credit score is different than what you initially told the lender, “it should still be pretty much almost the same difference from Lender A, Lender B, and Lender C based on who has the higher rate, the mid rate, or the lowest interest rate available.” So in other words, even if you’re not sure whether the credit score you gave the lenders is the best credit score, you’ll still get a good sense for which lender can offer you the best rate on your mortgage.
How many rate quotes to collect
You should get several quotes from lenders, and we don’t mean one or two! It’s a good idea to compare at least five lenders when rate-quote-shopping.
The more lenders you compare, the wider variety of rates you’ll see, and the better deal you’ll be able to snag.
When the time comes to actually apply with lenders (a much lengthier process), you can move forward with your favorite one or two.
When to do it
You can start gathering rate quotes while you’re home shopping and narrow down your options from there.
Rate quotes aren’t 100% accurate, but they’re a quick and simple way to compare the relative costs of each lender without needing to apply for a mortgage. Skipping this step while mortgage shopping could mean leaving money on the table!
Step 3: Compare quotes
Run the numbers
Helali says that when it comes time to run the numbers, there are three major factors buyers should look at:
- What’s the rate?
- What are the lender-specific fees?
- And what’s the APR going to be?
Of course, you’ll want to compare the rates each lender offers you. However, understand that this is only one metric of comparing costs and savings. There are other points to look at just as carefully.
One line item you’ll want to examine carefully that isn’t your mortgage rate is the lender’s fees. Nearly all loans have them. And while many fees and closing costs (like property taxes and recording fees) are fixed and non-negotiable, lender-specific fees can vary drastically from company to company.
A list of potential lender fees might include:
- Origination fees
- Application fees
- Credit report fees
- Broker fees
- Rate lock fees
A few things to note about lender fees here: First, whether they charge them and how much they charge is entirely up to the lender, but most lenders do charge at least some sort of fee. Second, lender-specific fees can’t exceed 3% of the total loan amount.
That may not seem like much, but if you’re borrowing $200,000, lender fees alone could tack on an additional $6,000 to your home purchase. Plus, they most often have to be paid out-of-pocket at closing.
Your rate quote from each lender should include information about lender fees. If it doesn’t, ask the lender for a closing cost breakdown. This should spell out the lender-specific fees under “Loan Costs” on your Loan Estimate.
Make sure to compare the “Loan Costs” from one lender to the next, and consider choosing a lender that charges fewer fees.
However, Helali warns, some lenders say they don’t charge fees, and then just charge a higher rate so they can still make a profit. So make sure you’re comparing both the rate and the fees.
Another way of assessing how much each lender is actually charging is to look at APR compared with the rate.
Your mortgage rate is the interest rate you’re charged on the loan, while your APR is your mortgage rate plus any finance charges on the loan — also known as the total cost of financing your home.
Looking at rate-to-APR is one way to suss out how many fees your prospective lender is charging you.
Some lenders might seem like they have super-low rates, but then their APR reveals that they pack in lots of fees. Other lenders may appear to have higher rates, but when you look at their rate-to-APR, they’re actually charging less than their competitors.
For example, let’s say you receive two lender quotes for a mortgage:
Monthly payment: $1,220
Upfront fees: $5,000
Monthly payment: $1,200
What can we surmise about Lender A? The rate and payment amount are higher. And with the APR tracking so closely to the rate — and no upfront fees due — we can see Lender A’s upfront costs are far lower.
For a buyer who chooses this option, it might be worth paying an extra $20 each month to keep that $5,000 in their pocket when they buy a home.
What about Lender B? The rate and payment amount is lower, saving you a bit of money over the life of the loan. But the catch is you’re also going to pay higher fees for this loan, plus you’ll have to pay out-of-pocket for a large chunk of them.
What’s your break-even point for that?
$5,000 / $20 per month = 250 months, or just under 21 years to get your money back.
When you think about what else you could do with that $5,000 — like how you could make it grow (for example, making equity-building improvements to the home) — Lender B’s offer doesn’t seem to be that much better of a deal after all.
Bottom line: The lowest rate isn’t always the best deal! By comparing rate to APR, you’re getting a much more solid picture of the actual costs of the loans.
Estimated monthly payment
The cost of your estimated monthly mortgage payment is yet another way to assess the affordability of your new home.
Even if your rate quote doesn’t give you information on your monthly payment, it’s relatively easy to figure one out. Just take your rate, loan amount, and loan term and plug them into a simple mortgage calculator. That will give you an idea of your monthly payments.
Of course, this estimated payment won’t include taxes and insurance, which can make up a large chunk of your monthly payment, but it can still give you an idea of how each lender compares in cost.
If, like most buyers, you’re putting down less than 20% on your new home (and not using a VA loan), you will likely have to pay mortgage insurance. This is a cost many buyers don’t think about while mortgage shopping. But they should!
Mortgage insurance costs between 0.5% to 1% of the loan amount annually, and is rolled into your monthly mortgage payment. If you’re using a conventional loan, you can drop the insurance when you reach 20% equity in the home.
But here’s the kicker: Unfortunately, you can’t shop around for mortgage insurance. Once you’ve chosen your lender, you’re stuck with their mortgage insurance provider and all associated costs. Would you rather pay 0.5% annually, or 1% annually? Probably a no-brainer.
If your rate quote doesn’t include information about MI, ask the lender and try to find out as much as you can about their insurance costs before you make your choice. You don’t want to do all that legwork to save 0.25% only your rate, only to find out the lender’s costly MI renders your savings null.
Also consider: Rate isn’t always everything
While getting a good deal on your mortgage is important, there are other factors to consider, like timing, customer service, and the ability to close deals in your neighborhood.
For example, sometimes a lender will approve your mortgage and offer you a good rate, only to tell you that it will take them 60 days to close the loan. Many real estate contracts are set up to close in just 30 days, so this timeline could put your contract at risk.
“I would look for lenders that offer some sort of on-time closing guarantee,” Larkin says.
Reliability is also key. Is it worth getting a super low rate if your lender never gets back to you when you call? Or if they mishandle your application and delay your closing?
Another thing to think about is whether the lender knows how to close deals in your area. Many markets have quirks that are better handled by local lenders.
“In my experience, going with big banks like Bank of America or Chase as your loan originator doesn’t usually work out very well in a negotiation process,” Larkin reveals. “You definitely want to talk to a local mortgage lender.”
The takeaway: It’s important to get a good rate, but you should also choose a lender that has strong customer service, quick closing times, and a demonstrated ability to get the job done in your neighborhood.
Step 4: Ask yourself some tough questions
What’s right for one buyer isn’t necessarily what’s right for the next. Take the time to ask yourself some important questions. You’ve got to think beyond rate and consider your long term goals and priorities.
- How long do you plan to stay in the home?
- What’s more important: monthly payment size, or how much you’ll pay for the home in interest over time?
- Does it make sense to pay for discount points on the loan? (Points are where you pay more upfront — usually 1% of the loan amount — to lower your rate around 0.25%. You can usually buy up to three points to take a total of 0.75% off the rate.)
- Or perhaps would that upfront money be better spent on home repairs, new furniture, moving costs, other investments, or even an emergency fund for a rainy day?
- Should you wait and save up more money for a bigger down payment to lower your rate?
- Is the rise in home prices in your area outpacing what you can save?
- Should you wait to improve your credit score so you can get a lower rate? Or buy now with slightly less favorable terms?
- Have rates been rising or falling over the past few weeks?
- Are rates super low? Borrowing “other people’s money” for cheap may be a better deal than putting down more upfront, if you can use that cash better elsewhere.
- Do you have enough cash reserves to pay for your mortgage in case you lose your job or the unexpected occurs?
This is a great time to lean on your agent, your mortgage team, and a trusted financial adviser.
It’s a big decision, and there’s a lot to think about! But it’s better to take the time to think it through now, rather than make a hasty decision that will negatively impact your finances for years to come.
Step 5: Get Loan Estimates from your top two choices
Now that you’ve carefully weighed your options and picked your favorite lender, it’s time to get a mortgage! (Well, once you’re under contract on a new home that is.)
After you and the seller have made a purchase contract, you’ll be able finalize your mortgage application and will get a Loan Estimate (you may have received an initial Loan Estimate earlier in the pre-application process, but you should receive another once you have identified a property and your application is complete).
What’s a Loan Estimate?
A Loan Estimate is a required disclosure you get from your lender after you apply for a mortgage that plainly lays out the details of your mortgage, including your loan terms, payment schedule, and a detailed list of your closing costs.
How to get your Loan Estimates
A lender is required to provide you a Loan Estimate within 3 days after you have completed your loan application.
“It’s rare for a lender to provide a loan estimate without receiving a complete application and running your credit,” Helali shares.
That’s because they need six key pieces of information to create an accurate Loan Estimate:
- The buyer’s full legal name
- Your income
- Your Social Security number so they can run a credit report
- The property’s address
- The property’s estimated value
- The mortgage loan amount (versus down payment amount)
Once you’re ready to get a Loan Estimate, you’ll want to gather all your financial documents and submit an application for a mortgage. This can take anywhere from 30 minutes to several days, depending on how prepared you are and how the lender accepts applications.
Fully applying for a mortgage is a much taller hill to climb than getting a simple rate quote, but it’s a necessary step to getting a home loan.
Understand that when you take this step, your lender will need to pull your credit. In the mortgage biz, this is what’s referred to as a “hard credit pull,” meaning it does take a few points off your score. However, you can rest easy that mortgage lenders won’t count this hit against you, and no matter how many companies you apply with, your credit will only be hit one time so long as you shop within a 45-day window.
“The credit agencies expect people to look at multiple options for mortgages,” Larkin says. “People think their credit is going to take a huge hit, but it’s minimal — a couple of points.”
How many lenders should you actually apply with?
According to Larkin, if you’ve done your homework, there’s no need to apply with more than two lenders.
But if you’re still unsure, it can’t hurt to submit more applications.
There’s at least one good reason to apply with multiple lenders: A Loan Estimate is the closest thing you can get to an apples-to-apples cost comparison. In fact, the Loan Estimate even has a “Comparisons” section on Page 3 so you can adequately compare costs from one lender to the next.
If you’re unsure of how the costs will play out, or running the math is making you dizzy, it might be worth the trouble to apply with several lenders.
When to do it
The time to complete your mortgage application and get an accurate Loan Estimate will likely be once you’ve entered into a contract with a seller on a home. That’s because most lenders will need the property’s address before they deem your application complete and can furnish an accurate Loan Estimate. Some lenders may provide you with a Loan Estimate before you identify a property or enter into a contract, but you will receive the updated and most accurate Loan Estimate once you have provided a purchase contract and completed all your application information.
After you are under contract on a home and you’ve narrowed down your lender options, you can apply for a mortgage and get a Loan Estimate — the most accurate estimate of what you’ll actually pay for your home loan.
Step 6: Lock in your rate
“The other thing to keep in mind is that rates can change on a daily basis, and sometimes they can change multiple times a day,” Helali explains. “So if somebody called around banks to get a quote a week ago, almost everybody that they chatted with would likely have slightly different rates and fees today.”
That is to say the rates you’re quoted are subject to change until you officially lock in the rate with your lender.
When can you lock in your rate? As a rule, you can lock your rate once you have a contract with a seller, and you’ve been at least preapproved for a mortgage.
Helali says you shouldn’t stop comparison-rate-shopping until the moment you’re ready to lock in your rate.
Remember: It ain’t locked until it’s locked. But once it is, you’re good to go.
Congratulations — you saved money and got a great deal on your mortgage!
Header Image Source: Jason Dent / Unsplash.com