How to Compare Mortgage Loan Offers

How to Compare Mortgage Offers

Comparing mortgage offers is a critical step when buying a home. Below are nine simple action items to help make that a little easier.

1. Decide What Type of Loan You Need

There are several different types of mortgages—and the one you choose can affect your required down payment, interest rate and monthly payment. Your options may include the following:

You'll also need to decide if you want a fixed-rate mortgage or adjustable-rate mortgage (ARM). ARMs typically start with a lower-than-average interest rate, then periodically adjust based on market conditions. That means your monthly payment could fluctuate over time.

Learn more: What Type of Mortgage Loan Is Best?

2. Research Reputable Lenders

When choosing a mortgage lender, start by asking friends and family members for recommendations. Your real estate agent might also point you in the right direction. It's also a good idea to do your own research. You might focus on local mortgage professionals or online lenders. Either way, be sure to read customer reviews and verify a lender's credentials before submitting your financial information.

3. Gather Multiple Loan Quotes

You can seek preapproval with multiple lenders, then compare rate quotes before choosing the best offer. The preapproval process involves submitting an application and providing some basic financial information related to your income, employment status, debts and assets.

Each lender will then complete a hard credit inquiry. That can temporarily reduce your credit score by a few points, but if you're applying for multiple preapprovals within a short time period (usually 14 to 45 days), most credit scoring models will treat them as a single inquiry. If all goes well, you should receive a preapproval letter that outlines your estimated:

• Loan amount
• Loan type
• Approved sale amount
• Interest rate
• Monthly payment
• Maximum loan-to-value ratio

Be aware: A preapproval quote isn't the same thing as a formal offer and does not guarantee that you'll receive funding. You'll still need to complete a mortgage application when the time comes.

4. Compare Interest Rates and APR

Once you have several preapproval letters in hand, you can start comparing your options. Your mortgage rate will be one of the most important factors to consider. This is the amount you'll pay for borrowing money, represented as a percentage of the amount borrowed. This number will affect your monthly payment and your total loan costs. Rates can vary from one lender to the next, but they're largely determined by:

• Your creditworthiness
• Current market rates
• Your loan term
• Whether the loan has a fixed rate or adjustable rate
• How much you borrow

Running the numbers through a mortgage calculator can clarify how much you'll pay in total interest. Just be aware that the interest rate is different from the annual percentage rate (APR). The APR tells you the total cost of borrowing including any fees. That can give you a more accurate idea of how much your mortgage will cost.

5. Look at Closing Costs and Fees

Closing costs are fees that are due when finalizing a home loan. They could include the following:

• Loan origination fees
• Appraisal fees
• Title search fees
• Real estate commissions
• Prepayment of a portion of your homeowners insurance, property taxes and mortgage insurance

These fees can vary depending on the lender, but it may be possible to reduce your closing costs by seeking seller concessions. This is when you negotiate with the seller to cover some of your closing fees. You can also check if your state or local municipality offers grants or low-interest loans to put toward your closing costs.

6. Check for Mortgage Points

Many lenders allow buyers to purchase mortgage points to permanently reduce their interest rate. Going this route will increase your closing costs, but the long-term savings may be worth it. For example, one discount point, which may cost 1% of your loan amount, might lower your rate by 0.25%.

7. Consider Monthly Payments

When it's time to compare mortgage lenders, consider each offer's estimated monthly payment—and make sure it's within your budget and doesn't affect your ability to save for other financial goals. One rule of thumb is to spend no more than 28% of your gross monthly income on housing expenses. A monthly mortgage payment typically includes the following:

• The principal amount borrowed
• Interest
• Property taxes
• Homeowners insurance

You might also be on the hook for mortgage insurance payments if your down payment is less than 20%. Mortgage insurance, property taxes and homeowners insurance are often paid monthly and held by the mortgage servicer in an escrow account. They'll use that to pay these bills on your behalf.

8. Calculate Your Total Cost Over Time

To determine which offer makes the most financial sense, consider costs that go beyond the interest rate and APR. You'll also want to look at each offer's:

• Loan term: A longer term will provide a lower monthly payment, but you'll pay more interest over the life of the loan.
• Mortgage insurance requirements: Loans guaranteed by the Federal Housing Administration (FHA), for example, require mortgage insurance. The same goes for a conventional loan if your down payment is less than 20%. Similarly, U.S. Department of Agriculture (USDA) loans charge funding fees. All of these can increase your total loan costs.

9. Negotiate

The quotes you receive aren't necessarily set in stone. It might be possible to negotiate—and ultimately save money on your mortgage. Here's how:

• Try to negotiate a lower interest rate. You'll probably have more leverage if you have good credit or have received better quotes from competing lenders.
• See if there's wiggle room on the closing costs. You can try talking down your lender's loan origination fee or application fee. You can also see if the seller is willing to cover any of your closing costs. They may be motivated if you're in a buyer's market and they're eager to finalize the deal.

Compare mortgage rates

Check today’s rates to find the best loan offers. Staying updated on current rates helps you secure a competitive mortgage and save more over time.

What to Do Before Applying for a Mortgage

If you're at the starting line of the homebuying journey, you can take the following steps to prepare your finances:

1. Check your credit. Mortgages typically have minimum credit score requirements, so understanding where you stand is important. You can get your free credit report and FICO^® Score^Θ from Experian or a credit report from AnnualCreditReport.com. Be sure to check your credit report for accuracy, and dispute any errors that may be hurting your score.
2. Improve your credit health. Strengthening your credit could help you qualify for better mortgage rates and terms. Focus on making on-time payments, keeping your balances low and avoiding new debt.
3. Get a feel for your local housing market. Look at listings online or connect with a real estate agent to get an idea of how much homes are going for in your area. Real estate comps can help. These are comparable properties that have recently sold and meet your criteria.
4. Save for a down payment and closing costs. Down payment requirements vary based on the mortgage type. Putting down 20% has long been the golden rule, but it's possible to get approved for a conventional loan with as little as 3% down. Closing costs usually add up to another 2% to 5% of the sale price.
5. Don't apply for new credit. Hard credit inquiries can temporarily reduce your credit score. Acquiring new debt can also increase your debt-to-income ratio (DTI), which is the amount of your gross monthly income that's currently going toward debt payments. The lower this number is, the better. Aiming for a DTI that's below 50% is a good goal.

How to Apply for a Mortgage

After choosing a lender and making an offer on a home, you can take the following steps to apply for a mortgage.

1. Gather the required documents. Contact your loan originator and confirm which documents you'll need. That will likely include a copy of your driver's license and Social Security card, recent pay stubs, W-2s from the last two years, bank and brokerage statements, information about your debts and documents related to other properties you may own.
2. Submit a mortgage application. This process is similar to applying for preapproval. Just be aware that loan underwriting typically takes one to two months. During this time, the lender will confirm that you meet their eligibility requirements. You can also expect them to order a home appraisal and title search. The lender should provide you with an official loan estimate within three business days of receiving your application.
3. Close on your mortgage. This is when you'll pay your closing costs and any remaining funds for your down payment. You'll also need to provide proof of homeowners insurance. The final step is signing the required paperwork to complete the sale.

Frequently Asked Questions

The Bottom Line

Shopping around for a home loan could result in serious long-term savings. Before you start house hunting, it's a good idea to compare mortgage lenders to see which one can offer you the best rate and terms. Just be sure your credit and down payment are as strong as they can be before seeking preapproval.