When most folx need to buy a car, they research reviews and best-of lists from the current or previous year. They’ll visit a few dealerships, do some test drives, and maybe see what’s for sale on online marketplaces.
So, why don’t most of us use this approach while taking out a mortgage?
A 2016 Zillow report found that most Americans spend 8 hours researching a home loan, the same amount of time they devote to planning a vacation. When it comes to shopping for a car, the average amount of time spent is 11 hours.
And yet, unlike a car or a vacation, a home is typically a six-figure investment and the largest purchase most of us make in our entire lifetime.
So, let’s be real: Taking out a mortgage can be far more overwhelming than buying a car or planning a trip. You’ll need a thorough inventory and understanding of your personal finances and you must navigate the complexities of multiple loan options from various lenders.
That being said, shopping around from various lenders can pay off big in the long run. Not only can you end up with a much better loan, but some homebuyers are denied a mortgage from one lender but can be approved for one by another.
We explain these and several more reasons why it can benefit you to spend the time and energy on shopping around for a mortgage.
And if you’re hesitant to go about it alone, you don’t have to. Here’s where to find help to take out a mortgage so you can navigate the process with guidance and support.
1. Interest rates can vary greatly
With a lower interest rate, not only will your monthly payment be lower, but a more expensive home may fit in your budget.
Plus, the money saved from even a half percentage point can add up significantly over time.
Take, for example, a $375,000 loan with a 30-year term:
$375,000 loan at 4.0%
- Monthly payment (principal and interest): $1,800
- Interest paid over 30 years: $270,000
$375,000 loan at 3.5%
- Monthly payment (principal and interest): $1,700
- Interest paid over 30 years: $230,000
- Monthly: $100
- Over 30 years: $40,000
$40,000? Think about what you could do with that!
2. Different lenders charge different fees
The one-time fees you pay to get a mortgage loan can vary too. A loan with high fees can cost more overall than one with a lower interest rate.
Some lenders give you a list of their fees, many of which pay for the work the lender does to process the loan. Origination, underwriting, and document preparation, for example.
The annual percentage rate (APR) also helps you compare fees. It accounts for both the interest rate and some fees, including lender fees. That’s why it’s almost always a bit higher than the interest rate. The closer it is to the interest rate, the lower the fees.
3. You can find more types of loans
Different lenders offer different types of mortgages (or “loan products” in lender-speak). By shopping around, you can find the best and most affordable mortgage for your situation.
For example, some loans:
• Require a lower down payment
• Let you roll closing costs into the loan
• Offer discounts if you take homebuyer ed
• Consider your rent payment history in your application
Cover the cost of an appraisal
Not all lenders offer loans for:
• New construction
• Multifamily homes
• Manufactured (mobile) homes
If you’re a veteran, a surviving spouse, or on active duty:
• Not all lenders offer VA loans
• Those that do might offer different types
4. You can be approved for different amounts
Different lenders use different formulas to decide how much money you can borrow. When you shop around, you’re more likely to find a lender whose formula goes your way.
Having more money to work with might be a priority in a competitive market. And if your credit history, credit score, or cash flow isn’t ideal, shopping around can make the difference between getting approved or denied for a mortgage.
5. You can give yourself a backup option
Why put all your eggs in one basket? Once you find the home you want, having more than one loan offer gives you flexibility and peace of mind.
Most likely, things will go smoothly. But if there’s a hitch in the process, it’s a huge advantage to simply pivot to your backup lender.