How to shop for and compare mortgage offers

Video how to compare loan estimates

Before you choose a mortgage lender, it’s important to shop around and compare multiple offers to get the best deal. Borrowers who shopped in October and November of 2022 could have saved $600 per year by getting two rate quotes from lenders. And by getting at least four quotes from lenders, borrowers could have saved $1,200 per year, according to a study conducted by mortgage underwriter Freddie Mac.

Keep reading to learn how to compare mortgage offers and find the best loan for your needs.

4 steps to compare mortgage offers

Step 1: Determine the right type of mortgage for you

Before you start to shop for mortgage offers, it’s important to determine what type of mortgage you want to apply for and what might be best for your unique financial situation, as well as your short- and long-term goals. Some of the questions that can help identify the most suitable mortgage for your needs include:

  • Where are you in your life, and how long do you intend to stay in the home?
  • Are you single?
  • Are you planning to have children?
  • Are you likely to change jobs in the coming years?
  • Is your income stable or likely to fluctuate?
  • How much of a down payment will you bring to the table? Do you have 20 percent or will you need a mortgage program that requires a smaller down payment, such as 3 percent?
  • What is your credit score?
  • Will you be shopping for a particularly expensive home that may require a larger loan than conventional loan limits?

Answering these questions will help determine how long you plan to stay in a home and thus the best loan term for your needs. Some of the additional questions can also help you narrow down whether it makes sense to apply for a fixed-rate or adjustable-rate mortgage and hone in on the specific type of loan program that you may want to apply for based on your down payment size, loan needs or credit score.

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Some of the mortgage options to consider include a conventional mortgage or a government-issued mortgage such as an FHA loan, USDA loan, or VA loan.

Step 2: Gather the necessary documentation

Once you know the kind of mortgage and term you want, gather documents that show your income, investments, debt and more. In order for lenders to give you the most accurate quote, they’ll need your:

  • Tax returns
  • W-2 forms and other documents reporting income
  • Bank statements
  • Statements for any investments, including brokerage and retirement accounts
  • Records of all your debt, including student loans, car loans and personal loans
  • Renting history
  • Gift letters indicating that money gifted to you to buy a home is not a loan, if applicable
  • Divorce, child support and alimony documentation, if applicable
  • Records of bankruptcy and foreclosure, if applicable

Step 3: Compare mortgage offers online

Once you have your documents handy, you can start comparing mortgage offers online. Talk to your bank and any other financial institution you have a relationship with because they may offer better deals to existing customers. Many banks award you a better rate if you set up automatic payments, or potentially if you maintain business or investing accounts with the institution. It’s a good idea to ask family and friends for referrals, too.

In addition, consider contacting a mortgage broker, who may be able to find you an offer you can’t find on your own. Mortgage brokers often work with lenders known as wholesalers, which don’t provide loans directly to consumers. Brokers earn their fees by finding the right lender and product based on your needs and situation and helping you navigate the process.

When comparing offers, consider the interest rate and annual percentage rate (APR). Interest rates can be fixed or variable and are determined by market factors and your creditworthiness. The APR, on the other hand, includes the interest rate and fees incurred when borrowing. The APR is the better tool for comparing the cost of a mortgage; however, if you’re not planning to stay in a home long-term, the interest rate might matter more, since APR assumes you’ll stick with the loan over its full term.

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Keep in mind that the interest rate only tells you so much about the cost of buying a home. Lenders typically disclose additional closing costs on the loan estimate (more on that later). The difference in closing costs might turn out to be more important than small differences in the interest rate.

Don’t be shy about reaching out to a mortgage lender by phone as you shop for mortgages. It can be a good idea to speak directly with a loan officer or prospective lender who can assess your unique financial situation and provide expert advice.

Step 4: Comparing loan estimates

The loan estimate is an official three-page document that lists several key numbers associated with your loan, including:

  • Loan amount
  • Quoted interest rate
  • Closing costs
  • Prepaid interest
  • Third-party fees
  • Escrow expenses
  • Monthly payment estimate

Every lender is legally required to provide you with a loan estimate within three days of getting your application and pulling your credit report.

On the loan estimate, keep an eye out for:

  • Balloon payment: Mortgages with balloon payments have a lower monthly payment (usually only interest) for a period of time. Then, you must refinance or pay off the full balance at the end of the term. If you won’t be in the home long-term, this might be one way to ensure a lower payment.
  • Prepayment penalty: This is a fee you must pay if you pay off your loan early. Most mortgages don’t have a prepayment penalty, but it can’t hurt to confirm.
  • Private mortgage insurance (PMI): This is an additional monthly cost for borrowers who put down less than 20 percent.
  • Estimated cash to close: This is the total cash needed to close the loan, including outstanding closing costs and prepaids.

Comparing loan estimates can help determine which offer is more cost-effective. Some lenders promise low interest rates but also charge excessive fees and closing costs, so make sure you pay attention to all the loan terms, not just the rate.

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Lenders may also quote you a low rate made possible by purchasing mortgage points. Also known as discount points, these are upfront fees you pay to lower your interest rate. Depending on the cost of those points, this may not make sense for you. A different lender may be able to offer you the same rate or better without the need for points. Again, how long you plan to stay in the home and keep the mortgage is a key factor in deciding whether to buy points.

Why compare mortgage offers?

Shopping around for a mortgage is an important step to ensure that you’re getting the most competitive rate and mortgage terms possible. It’s an effort that can save a substantial amount of money up front and over the life of a mortgage as well. Even an interest rate savings of as little as 0.1 percent, for instance, can result in thousands of dollars remaining in your pocket over the life of a mortgage, according to Bankrate’s mortgage amortization calculator.

In addition, many homebuyers don’t realize that the price and terms offered on a mortgage may be very different from one lender to the next, as each lender sets its own underwriting guidelines. You may even be able to negotiate mortgage costs with a particular lender.

Because a mortgage is one of the most substantial financial commitments you’ll make in a lifetime, it’s important to do your due diligence and ensure you’ve investigated all of your options thoroughly.

Next steps for comparing mortgage offers

Shopping for a mortgage is well worth your time, especially if you plan to remain in your home for the long term. Not sure where to start? Check out Bankrate’s mortgage rate tables, which let you plug in general information about your finances and location to receive competitive mortgage quotes and tailored offers. Compare your options and read each loan estimate you receive thoroughly to choose the best deal for you.