Don’t accept your first mortgage rate quote

In this article:

Shopping for a can positively affect your budget for years to come.

• Even a slight improvement in your mortgage rate can save you hundreds or even thousands per year.
• Mortgage lenders are required to provide you with a Loan Estimate, an official and universal form that consumers can use to comparison shop. You must apply for a loan to receive a Loan Estimate, but most lenders are willing to issue the document to consumers who are still shopping.
• Mortgage pricing changes continuously. Round up your quotes quickly so that you’re making valid comparisons, then take your time reviewing offers.

Half of loan applicants accept higher fees

Few of us buy plane tickets, cars or even gasoline without comparing prices – it’s the American way.

Yet the Consumer Financial Protection Bureau (CFPB) says that nearly half of US consumers do not comparison shop for home loans.

Spending a little more time upfront could mean spending much less in the future. Even a slight improvement in your mortgage rate can save you hundreds or even thousands per year.

That money could be allocated to savings, a child’s college education, or other financial goals.

Shopping for a mortgage: Small time investment, big savings

The fact that half of American’s don’t shop for the biggest loan they will take in their lives is serious.

It means millions are paying a lot more than they should for their mortgages. In 2012, for example, a Stanford University research team found that mortgage borrowers who compared quotes from several lenders saved a median $2,664 in loan fees for a $200,000 mortgage.

No consumer wants to pay that much more in fees, but many don’t realize how much they are paying.

Refinancing borrowers often roll closing costs into their new mortgage amount. They don’t pay them out-of-pocket.

This can lull borrowers into apathy. It feels like the extra fees don’t matter since the total loan amount increases by only a small percentage.

Yet they will have to pay back the costs of not shopping when they sell the home or otherwise pay off the mortgage. Mortgage borrowers should be vigilant about paying as little as possible for their home purchase or refinance loan.

Fortunately, the law requires lenders to fully disclose accurate loan terms upfront so the borrower can make an informed decision.

Lender disclosures are designed for shopping

Mortgage lenders are required to provide you with a Loan Estimate, an official and universal form that consumers can use to comparison shop.

You must apply for a loan to receive a Loan Estimate, but most lenders are willing to issue the document to consumers who are still shopping.

To get a meaningful quote, you’ll need to provide the following information to each lender.

• • Name
  • Gross (before tax) income
  • Social Security number (for your credit score)
  • Address of the property (if known)
  • Estimated property value or sales price
  • Loan amount

Note that some lenders will not issue disclosures to home buyers who do not have made an offer on a property. Without a property address, a loan inquiry is not technically an application. Lenders are only mandated to issue disclosures on full applications.

Refinance shoppers inherently have a property address since they are looking to get a lower rate on a property they own. In this case, the lender must issue required disclosures.

But for buyers, lenders may provide a “worksheet” or “scenario.” That is not necessarily a bad thing, but you should understand that the actual federally-mandated disclosure provides more protection for borrowers than non-standard worksheets.

The loan estimate: A powerful tool for comparing fees

The Loan Estimate is three pages long. Each page details different aspects of your proposed loan. In this one document, you should have all the necessary information you need to choose the best combination of rates and fees.

Page one

The first page contains your name, the property address (if known) and the most important terms of the loan such as:

• • Length of the loan
  • Loan amount
  • Interest rate
  • Payment
  • Closing costs
  • Prepayment penalties or balloon payments

One important highlight is the Rate Lock, in the upper right corner. It tells you if your rate is locked in, or if not, how long the rate and cost estimate will be valid, should you wish to lock in.

Page two

This page lists all of the loan costs. Pay special attention to section “A” as it details the lender’s fees which are negotiable.

Sections “B” and “C” will be similar across most lenders, although there could be slight differences. These sections detail charges paid to third parties like appraisers, title companies, credit bureaus and county recorders.

You’ll also see a list of prepaid expenses. These are not charges for your loan, but are costs associated with home ownership that you’d have to pay even if you did not have a mortgage – property taxes and homeowners insurance, for example.

You’ll see that some of these services are flagged to show that you’re allowed to shop around and choose your own provider, while others are chosen by the lender.

It’s a good idea to shop for title and escrow services in states that allow it because prices can vary widely in some areas.

Page three

This page is designed to help you compare different loan programs by showing you how much you will have paid and how much you’ll have reduced your loan balance in five years.

It also lists the Total Interest Percentage (TIP), which tells you the ratio of your total interest and loan costs to your loan amount, and the Annual Percentage Rate (APR), which incorporates your loan fees and interest rate.

However, APR is probably not the best measure of a loan’s cost unless you are comparing loans with the same terms and plan to keep your mortgage for its entire duration.

Final details include the late payment fee, the loan’s assumability and servicing.

Shop quickly, review slowly

Mortgage pricing changes continuously, like stocks, bonds and other financial products.

This means a rate quote from Lender A on Monday morning can’t reliably be compared with one from Lender B on Tuesday afternoon. Round up your quotes quickly so that you’re making valid comparisons, then take your time reviewing offers.

Mortgage shopping does not have to be a tedious process. Getting written quotes from just three lenders is usually sufficient.

What are today’s rates?

Mortgage rates are low and lenders are eager to compete for your business. Most lenders will negotiate on your rate and fees if you have multiple quotes in hand.

Get a rate quote as the first step in your shopping experience. There is no obligation to continue once you receive your quote if it is not the best one you receive.