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What You Don’t Know Could Cost You! Here’s How to Shop For Mortgage Rates The Smart Way!

by Mark Fitzpatrick on April 23, 2014 · 11 comments

  
How to Shop for Mortgage Rates

It’s always a good idea to shop at least a few different lenders to compare mortgage rate quotes, right?

After all, a mortgage is a big financial commitment, and shopping around for a better deal can potentially save you thousands or tens of thousands of dollars in finance charges over the life of the loan.

Having said that, it’s not just important to shop around, it’s important to shop around the right way.

There’s a few important things you need to be aware of to make sure you’re truly getting the best deal possible.

How to Shop For Mortgage Rates

Many shoppers don’t realize that there are a number of factors that can have a significant impact on the rate and fees you pay for a mortgage. When you’re just shopping around, lenders haven’t yet confirmed all of your qualifications, such as the payoff amount of your existing mortgage (in the case of a refinance), appraised value, how much is needed for escrow deposits, etc., so they need to make certain assumptions when they run their numbers.

What makes mortgage shopping tricky is that lenders often use very different assumptions, which can make some rate quotes look unrealistically better than others.

Related: Shopping for Commercial Loans

The key to shopping rates effectively is to make sure that all the lenders you talk with are using the same or similar assumptions for a few key factors. The following is a list of some things to look out for:

1. Estimated appraised value

The estimated appraised value is a key part of what determines loan-to-value (LTV), which is an important risk factor for the bank. If one lender is assuming a higher appraised value, it’s likely you’ll get a better offer because the LTV is lower. Make sure all the banks you’re shopping run their numbers based on the same or a similar estimated appraised value.

2. Loan amount

Loan amount is the other key component of LTV. If one lender is assuming a much lower loan amount, their offer may look better on paper because the LTV is lower. If one rate quote comes with a loan amount radically different than the others, look for major variances in how much is predeposited for your escrow account or prepaid interest, closing costs, payoffs for existing mortgages, down payment amount, etc. Be sure to ask the lender to explain the assumptions behind their projected loan amount.

3. Payoffs for existing mortgages

If you’re refinancing, the payoff amount of your existing mortgage(s) will impact the new loan amount, which of course impacts LTV and the rate quote. To make sure each lender is assuming the same payoff figure, I recommend calling your current lender and requesting a payoff amount for all mortgages on your property. When they ask what date to calculate the payoff through, give them a date about 30 days in the future. Make sure each bank you’re shopping with uses this payoff amount for their rate quotes.

4. Escrows or no escrows

Whether or not you opt to escrow your taxes and insurance can impact the pricing on the loan. Make sure the lenders you’re shopping make the same assumption about whether you’re setting up an escrow account.

5. Rate lock term

The length of the rate lock can have a big impact on the rate quote, so it’s important that all the lenders you’re shopping assume the same rate lock term. Rate locks cost the lender money, and the longer the lock, the less favorable the pricing will be on the rate quote. In fact, many lenders use rate locks as a gimmick to advertise really aggressive rates. I know of one lender that used to do this all the time; you’d hear an incredible rate on the radio, then when you picked up the phone to call, you would discover the rate came with no rate lock. Wow, serious? Considering how much rates can change in the span of just a few days, I don’t why anybody would want to gamble about where they’ll be in a month or two. I recommend going with at least a 45 to 60 day rate lock, but whatever you choose, make sure it’s consistent across all rate quotes so you’re truly comparing apples to apples.

6. Type of loan

The type of loan you select, whether it’s a 30-year fixed, 15-year fixed, 5/1 ARM, etc., can have a big impact on a rate quote. Make sure that all lenders are assuming the same type of loan when running their numbers.

7. Property type

If you’re financing a multiunit property, condo, or townhome, confirm the lender knows that because it can impact the loan pricing. Loan officers shouldn’t just assume certain things about a loan, but it’s not uncommon for them to do so. You want to make sure they’re not assuming you have a single-family home or the rate quote could be unrealistically attractive.

All of these factors can have a big impact on a rate quote, so you want to make sure all the lenders you’re shopping are making the same or similar assumptions for each. If one lender is out in left field on one or more of them, have them fix it and update their quote.

Related: What Type of Property Should You Buy?

The key to shopping around for a mortgage is to make apples to apples comparisons between rate quotes. Only when you do that can you determine which rate quote is the best deal.

Allow the Lender to Run Credit

I also highly recommend that you allow each lender to run your credit. Credit scores can have a big impact on a rate quote, so you want to make sure that the lenders know exactly what your credit scores are. Even a variation of 10 or 20 points can significantly change what they offer you.

Plus, when the lender has a complete application, which includes a current credit report, they’re required by law to send you a Good Faith Estimate that largely locks them into their estimates for the third party closing costs. If you haven’t completed an application with a credit report, they’re not required to honor the fee estimates they give you.

Shop Around for the Best Mortgage Rates, But Shop Smart

Shopping around for a rate quote is a smart idea, but it’s important than you do it right. The key to shopping right is making sure that all lenders are using the same assumptions for the factors I’ve covered here when they’re running their numbers. This enables you to make a true apples to apples comparison between rate quotes so that you can truly determine which quote is the best deal.

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{ 11 comments… read them below or add one }

Ted Schmidt April 23, 2014 at 1:09 pm

Mark,
If multiple lenders run my credit report, won’t that cause many inquiries causing my score to go down or is that only of you are turned down?
-Ted

Reply

James April 23, 2014 at 1:38 pm

That’s my question too! The last time that I went to refinance, I was told that after running my credit score, my credit rating would be lowered slightly for about 6 months! If several lenders run my credit, I will end up being charged a higher interest rate for the lower score!

Reply

Mark Fitzpatrick April 24, 2014 at 9:00 pm

Hi Ted, as long as the inquiries happen in a short period of time, they’ll be counted as one for scoring purposes by the credit bureaus. The credit bureaus understand the importance of shopping around, so they don’t penalize you as long as its done in a reasonable period of time, like a few days to weeks.

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Paul Salmela April 23, 2014 at 1:11 pm

Good info! A few years ago I was shopping around for a few mortgages on my rental properties. It could have been a coincidence but my credit score seemed to get lower as I had more institutions run my credit. Do you know if having your credit run several times can adversely impact credit?

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Ryan April 23, 2014 at 3:03 pm

I had the exact same comment regarding having every lender run your credit score. Based on my experience, like the other comments, I would not recommend that. I am not sure how much it impacts the credit score but it does show up on the credit report and I avoid having anyone run my credit score unless I am going to move forward with them.

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Sonia Spangenberg April 24, 2014 at 7:17 am

I’ m not sure if i am missing something. Would it be effective to take the list of assumptions you gave and make your own specifics according the the list, then have the lenders run the numbers on your list of assumptions rather than their own? That way everyone is working on the same numbers from the get go. It seems that would be easier than sorting it out after the fact.

Reply

Mark Fitzpatrick April 24, 2014 at 10:17 pm

Hi Sonia, that’s a great idea. If you already know what you want and what your qualifications are, list them out and tell the lenders to run their numbers accordingly. That way you’re getting true apples to apples rate quotes and can more easily determine which one is the best deal.

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Sharon Tzib April 24, 2014 at 8:06 am

I’ve been told as long as the credit pulls are done in a 30 day time period for a similar reason (like buying a car or a house), then it shouldn’t affect your credit. Never tested the theory though. Will be curious what Mark says.

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Mark Fitzpatrick April 24, 2014 at 10:09 pm

Hi Sharon, that’s exactly right. You don’t need to worry about an adverse impact on your scores as long as you do your shopping in a relatively short period of time.

Reply

Mark Fitzpatrick April 24, 2014 at 10:15 pm

The following is from MyFICO’s website:

Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

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pati anderson April 24, 2014 at 2:51 pm

I hope mortgage credit inquiries are different than auto loans. this is what happened with my car loan 1 -1/2 yrs ago, I bought a new car, one dealer sent my info to 17 different lenders…Yikes, I have 17 inquiries still on my credit report. the whole, “if it’s done within a 30 day period, or you end up buying the car, it only counts as 1″ sure didn’t work in my case. BTW, I bought a car but not from that dealership

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