Let’s Shop for Mortgage Loans
This article was originally published on May 29, 2018 and expired on June 30, 2018. It is provided here for archival purposes and may contain dated information.
Driving through our local communities I’ve seen lots of “for sale” signs on houses. Are you shopping for a new home to purchase? If so, are you spending enough time shopping for your mortgage loan too?
Shop around to find the best interest rate you can on loans. According to research from the Consumer Federal Protection Bureau (CFPB), many people think the rates at different financial institution are the same – but that’s not necessarily true! Additionally, research indicates that failing to comparison shop for a mortgage costs the average homebuyer approximately $300 per year and many thousands of dollars over the life of the loan.
Even given the same loan amount, credit score, and other basic information, financial institutions often offer different loan interest rates. For example, today the Explore Interest Rate tool on the CFPB website, shows that for someone with a credit score of 690, most lenders in Illinois are offering rates at or below 5.0% for a 30 year, fixed rate, $135,000 loan. However, if someone just went to one lender to apply for a loan, they could be offered a loan as low as 4.625% or as high as 5.875%!
Does a difference of 1.25% really matter? Yes! Even small variations in a 30-year interest rate can add up over time to big dollars. In the first 5 years, the higher rate would cost someone $8,402 more than the lower rate. Over 30 years, it would cost them more than $37,600. Shopping around can save you money.
I’ve heard people say they don’t want to shop for a loan because they worry that it will hurt their credit score. We do need to keep our credit scores in mind when applying for loans. However, according to the CFPB, if you submit multiple loan applications within 1 - 45 days of each other, it will not affect your credit score.
What are good mortgage shopping strategies?
First, check your three main credit reports to make sure there aren’t any errors and to see what steps you can take to raise your credit scores. You can receive each of your three reports free at www.annualcreditreport.com. If you’d like a paper form to submit, rather than collecting the reports online, you can download it at https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf or call your local Extension office.
Many credit reports have errors, and your reports at the different credit bureaus may be different. Check your reports a few months before you plan to purchase a home so that you’ll have time to make any necessary corrections.
Next, when you know approximately how much money you’d like to borrow, talk to multiple lenders (at least three is recommended). Make sure to compare the overall terms and fees for each loan to understand the true cost of each loan you’re considering.
Ask each lender about other loan products they sell that might be right for you. You may qualify for several different loans, and the rates and fees on each product are likely to vary.
When you’re ready to move forward with a home purchase, ask lenders to complete a Loan Estimate form so that you can make the best decision for you.
Throughout the home buying process, take the time to visit the Consumer Federal Protection Bureau’s “Owning a Home” website, https://www.consumerfinance.gov/owning-a-home/, for excellent resources such as a Roadmap to Help You Plan and the Loan Estimate Explainer.
I really like their interactive “Explore Interest Rates” tool, at https://www.consumerfinance.gov/owning-a-home/explore-rates/, that allows you to input your state, loan amount, credit score and other variables to see what interest rate you’re likely to pay and how that affects your monthly payments. The data on this page is updated twice a week. Even if you’re not buying a home, it’s very interesting to see how changing one variable affects monthly payments.
Buying a home is an exciting but challenging event! Take the time to do your research and shop around for the home AND the mortgage to keep your costs lower.
If you would like help obtaining or understanding your credit report, Money Mentor volunteers now hold office hours to answer questions like these. Call University of Illinois Extension at 217-333-7672 to schedule a time.
Source: Kathy Sweedler, Extension Educator, Consumer Economics, firstname.lastname@example.org
Pull date: June 30, 2018