As I explained in part 1, lenders don’t have one set of rates and fees for a given loan program or borrower. Their rate sheets have a series of interest rates that range from low to high. If you want to get the lowest rate on the rate sheet, expect to pay more in closing costs. If you want to pay minimal closing costs, expect to be charged a higher interest rate.
There’s no getting out of at least some closing costs because the lender has to hire various services to get your loan done. The trick is to structure the interest rate and fees in the most advantageous way for your financial goals and needs.
Again, if you plan to keep the loan only for a few years, it’s usually best to keep your closing costs as low as possible. If you know you’re going to keep the loan long term, it might make sense to pay more in closing costs to get a lower rate. The lower interest accruals over time can more than make up for the higher initial closing costs.
Now that we’ve gone over how mortgage pricing works in part 1 of this article, let’s dig into the nuts and bolts of how to use this information to get a great mortgage deal.
Comparing Apples to Apples
There are a lot of factors that can influence the pricing of a rate and fee quote, including loan amount, property type, credit score, loan-to-value (LTV), etc. When you’re at the shopping-around stage, lenders haven’t yet confirmed all the parameters that can influence the loan pricing. For example, they don’t have an appraisal and they don’t know the payoff amount for your existing mortgage (assuming you’re refinancing). Without those two numbers, there’s no way the lender can truly know the LTV of the loan, which can significantly impact the pricing (lower LTVs tend to get lower rates at lower cost). All lenders can do at this point in the process is assume what these parameters might look like.
What makes it tricky to compare loan offers is that different lenders will use different assumptions, which puts you in the position of comparing rate quotes that aren’t really comparable. Instead of comparing apples to apples, you’re comparing apples to oranges.
The following are some the most common parameters that influence loan pricing:
- Loan type and term. Different types of loans (30-year fixed, 5/1 ARM, 10-year fixed, etc.) price out very differently from one another. All rate quotes need to assume the same type of loan product.
- Rate lock. I recommend getting at least a 45-day rate lock on your quotes.
- Estimated appraised value (for refinances) or purchase price (for purchases).
- Existing mortgage balance (for refinances). Add at least one payment to your current principal balance so it’s padded somewhat.
- Property type (SFR, condo, duplex, etc.)
- Escrows/impounds (are taxes and insurance to be impounded and added to your payment?)
The key to the shopping strategy I’m about to teach you is to make sure all rate quotes are based on the same starting assumptions. If they’re not, you may think one offer is the best when it’s really not. How is that possible, you might ask? A perfect example is rate lock. Rate locks cost lenders money, and the longer the lock period, the more it costs. If one lender is assuming a short rate lock period (such as 15 days), they can make their quote look much more attractive than a lender who is assuming a more responsible 45- or 60-day rate lock. Whatever rate lock period you choose, you want to make sure all lenders you’re shopping with are assuming the same or similar rate lock period.
Some lenders can essentially manipulate these assumptions in their favor to make their quote look more attractive than their competition. They know that if you start the process with them, you’re much less likely to switch to another lender and start all over if/when you discover their scheme.
Before you start shopping around, you may want to jot down a value for each of the assumptions above. A good loan officer may legitimately have a different opinion on some of these and you may even want to take their advice. Regardless of whether you use your assumptions or the lenders, make sure all lenders are using the same assumptions when running their quotes. Again, you want to be comparing apples to apples, not apples to oranges.
Before You Start Calling Lenders
Unless you know exactly what your credit looks like, I highly recommend pulling a copy of your credit report before you start shopping for a mortgage. I’ve worked with many mortgage borrowers over the years who were surprised to find erroneous information on their credit reports and had a tough time getting a good deal as a result.
Federal law entitles you to get one free credit report annually from AnnualCreditReport.com.
Do Your Shopping Within a Span of a Few Days
I highly, highly, highly recommend prequalifying with whatever lenders you select within a span of a few days at most. Ideally, you want to do it all the same day in the morning. There are three big reasons for this:
- Prequalifying with several lenders in a short time span protects your credit scores. Multiple mortgage credit inquiries in a short time span are counted as one for scoring purposes by the credit bureaus. And yes, you want each lender to run your credit. I’ll cover more on why that is in a minute.
- Mortgage rates change daily, sometimes even a few times a day if market conditions are particularly volatile. You want to make sure you’re quoted by all three lenders during the same market conditions. Rate quotes days or weeks apart are not apples to apples quotes.
- Ideally, you want to get your quotes in the morning. If the rate quote is attractive, you can lock that same day before financial markets close. This may not always be possible, but it’s not a bad idea. The more time that passes since the quote, the more likely the lender won’t be able to honor it anymore.
Yes, it can be a pain to shop around with a few lenders in the same day, but sometimes you’ve got to put in a little effort to get good results. A mortgage loan is a very long term and expensive commitment, so you want the best deal you can get.
How to Shop for a Mortgage
Select three reputable lenders and do a full application with each, including running a credit report. Yes, it’s kind of a pain in the neck, but it’s important for a few reasons:
- One of the most important parameters I didn’t put on the list above is credit scores. A few points either way on your scores can significantly impact the pricing on a loan offer. You want the lender to have an accurate picture of your credit when pulling together their offer.
- Completing an application means the lender required by law to provide you with a Loan Estimate, which really helps when comparing loan offers.
- Putting the quote in writing also commits the lender to the quote, which means they can’t stick you with bogus fees when you’re deep into the loan process. The lender has to honor their estimates within strict tolerances unless it can document circumstances beyond their control.
Once the loan officer has completed the application and run credit, ask them to send you a Loan Estimate electronically. You want to get your rate quotes fast because rates are changing all the time.
Once you have three rate quotes in writing, make sure all three are using the same assumed parameters that I listed above. Once you’ve confirmed that they are, pick out the quote that appears to offer the best balance between interest rate and fees. Then, call back the other two lenders and ask them to match the interest rate on your preferred quote, recalculate their net closing costs, and put their updated offer in writing with a new Loan Estimate (again, have it sent via email).
Once all three Loan Estimates have the same interest rate, it should be pretty clear which quote is offering the best value.
Once you’ve decided which lender to go with, call the lender back and have them lock in the rate immediately. I recommend using a responsible rate lock period such as 45 to 60 days, but if you’d rather go shorter to try and get a better deal, that’s your prerogative. Just make sure each rate quote reflects the same rate lock you’ve chosen.
Once you’ve requested the rate lock, make sure the lender sends you a confirmation in writing that confirms the interest rate, lock period, and fees.
Not only do you want to confirm that the rate lock is in, but you want to also make sure they sold you pricing they can honor. Some unscrupulous lenders out there will sometimes undersell their rate sheet, meaning they quote you pricing that’s better than they can actually honor at that time and hope the market “floats” down to their quote at some point in the process. You don’t want to fall victim to that. You want confirmation of the lock so you know it’s in place and the lender gave you an honest quote.
A Few Quick Tips
Again, make sure to do your shopping in the span of a few days at most. Interest rates change from day to day (even from hour to hour if markets are volatile), so you want to make sure your rate quotes are generated at the same time in the market.
Once your rate lock is in, keep in mind that the clock is ticking! Don’t drag your feet getting the lender the initial paperwork they need. You don’t want to risk the rate lock expiring, which could mean losing that great rate or having to pay rate lock renewal fees.
Happy mortgage shopping!