The best home loan: how to shop for and compare mortgage offers

Because a mortgage is one of the most substantial financial commitments you’ll make in a lifetime, it’s important to do your due diligence and ensure you’ve investigated all of your options thoroughly. Before you choose a mortgage lender, though, you must shop around and compare multiple offers to get the best deal. Regular payments on the same sized loan can vary by $100 a month, according to a recent survey by the Consumer Finance Protection Bureau. Over the 30 years of a mortgage, this difference could save you $36,000.

Keep reading to learn how to compare mortgage offers and find the best loan for your needs.

How to compare mortgage offers

To ensure you get the best offer you can, there are some steps you need to take.

Step 1: Determine the right type of mortgage for you

Before you start to shop for mortgage offers, it’s important to determine what type of mortgage you want to apply for and what might be best for your current financial situation, as well as your short- and long-term goals. Some of the questions that can help identify the most suitable mortgage for your needs include:

• Where are you in your life, and how long do you intend to stay in the home?
• Are you single?
• Are you planning to have children?
• Are you likely to change jobs in the coming years?
• Is your income stable or likely to fluctuate?
• How much of a down payment will you bring to the table? Can you manage 20 percent of the home price, or will you need a mortgage program that requires a smaller down payment, such as 3 percent?
• What is your credit score?
• Will you be shopping for a particularly expensive home that may require a larger loan than conventional loan limits?

Answering these questions will help determine the best loan term for your needs. For example, if you have a lower credit score, an FHA loan may be the best option for you because they come with lower credit requirements than a conventional mortgage. VA and USDA loans require no money down, which is a huge appeal for those who qualify.

These questions can also help you narrow down whether it makes sense to apply for a fixed-rate or adjustable-rate mortgage (ARM). For those who plan to stay in a home long-term, a fixed-rate may make the most sense. However, if you plan to sell within, say, five years, an ARM could give you a lower payment.

Types of lenders

Knowing where to apply for a mortgage can also help you find the best fit for your needs. There are many different types of lenders, including brick-and-mortar banks, credit unions and mortgage companies. Each offers slightly different mortgage options.

National or regional banks are for-profit businesses and as a result their mortgages may come with more fees than some other options. But banks are also able to offer a variety of loan options, which may be important to you, and of course other services, allowing for one-stop-shopping.

Credit unions, by contrast, are non-profit operations and often charge fewer fees. And if you’re looking for the lowest rate possible, credit unions may also be a better bet, as they’re known for offering competitive loan terms. You may also find more flexible lending criteria at some credit unions. However, they may offer few choices.

Mortgage companies, many of which are online operations, are an increasingly large part of the industry. Also known as non-bank lenders, they specialize in home loans; in fact, that’s typically all they do. So, not so good if you want to have a CD, savings account, checking account and mortgage all in the same place — but very good if you want an unusual product, a range of options or competitive terms. Many also are quite speedy, offering preapprovals, closings and fundings within days — especially the digital firms.

Step 2: Gather the necessary documentation

Once you know the kind of mortgage and term you want, gather documents that show your income, investments, debt and more. In order for lenders to give you the most accurate quote, they’ll need your:

• Tax returns
• W-2 forms and other documents reporting income
• Bank statements
• Statements for any investments, including brokerage and retirement accounts
• Records of all your debt, including student loans, car loans and personal loans
• Renting history
• Gift letters indicating that money gifted to you to buy a home is not a loan, if applicable
• Divorce, child support and alimony documentation, if applicable
• Records of bankruptcy and foreclosure, if applicable

By having these documents ready ahead of time, you can make the mortgage application process quicker and easier.

Step 3: Compare mortgage offers online

Once you have your documents handy, you can start comparing mortgage offers online. Talk to your bank and any other financial institution you have a relationship with because they may offer better deals to existing customers. Many banks award you a better rate if you set up automatic payments, or transfers, from an in-house account. It’s a good idea to ask family and friends for referrals, too.

When comparing offers, there are some other things you should consider:

• Contacting a mortgage broker: A mortgage broker may be able to help you secure a great deal on a mortgage. They often work with lenders known as wholesalers, which don’t provide loans directly to consumers.

• The interest rate and annual percentage rate (APR):  Interest rates can be fixed or variable and are determined by market factors and your creditworthiness. The APR, on the other hand, includes the interest rate and fees incurred when borrowing, making it a more complete picture of the actual cost of the loan.
• Closing costs: Closing costs are a bundle of additional fees you’ll need to pay to buy a home. They can account for 2 to 6 percent of the home’s purchase price. Lenders typically disclose closing costs on the loan estimate (more on that later). The difference in closing costs might turn out to be more important than small differences in the interest rate.

Don’t be shy about reaching out to a mortgage lender by phone or even in person as you shop around. It can be a good idea to speak directly with a loan officer who can assess your financial situation and advise.

It’s also important when shopping around for lenders to consider their online reviews and ratings. Taking the time to review this information can be very revealing including telling you which lenders are known for providing the best customer service and most competitive rates. As you’re looking at reviews, keep an eye out for customer service details: whether the lender responds to criticism and promptly addresses concerns.

Step 4: Compare loan estimates

The loan estimate is an official three-page document that lists several key numbers associated with your loan, including:

• Loan amount
• Quoted interest rate
• Closing costs
• Prepaid interest
• Third-party fees
• Escrow expenses
• Monthly payment estimate

Every lender is legally required to provide you with a loan estimate within three days of getting your application and pulling your credit report.

On the loan estimate, keep an eye out for:

• Balloon payment: Mortgages with balloon payments have a lower monthly payment (usually only interest) for a period of time. Then, you must refinance or pay off the full balance at the end of the term. If you won’t be in the home long-term, this might be one way to ensure a lower payment.
• Prepayment penalty: This is a fee you must pay if you pay off your loan early. Most mortgages don’t have a prepayment penalty, but it can’t hurt to confirm.
• Private mortgage insurance (PMI): This is an additional monthly cost for borrowers who put down less than 20 percent.
• Estimated cash to close: This is the total upfront money needed to finalize the loan, including outstanding closing costs and prepaids.

Comparing loan estimates can help determine which offer is more cost-effective. Some lenders promise low interest rates but also charge excessive fees and closing costs, so make sure you pay attention to all the loan terms, not just the rate.

Lenders may also quote you a low rate made possible by purchasing mortgage points. Also known as discount points, these are upfront fees you pay to lower your interest rate. Depending on the cost of those points, this approach may not make sense for you. A different lender may be able to offer you the same rate or better without the need for points. Again, how long you plan to stay in the home and keep the mortgage is a key factor in deciding whether to “buy down the rate,” as the financial pros put it. It’ll take a few years to break even on upfront costs of the points and for your savings to start.

Why compare mortgage offers?

Shopping around for a mortgage is an important step to ensure that you’re getting the most competitive rate and mortgage terms possible. It’s an effort that can save a substantial amount of money up front and over the life of a mortgage as well. Even an interest rate savings of as little as 0.1 percent, for instance, can result in thousands of dollars remaining in your pocket over the life of a mortgage, according to Bankrate’s mortgage amortization calculator.

In addition, many homebuyers don’t realize that the price and terms offered on a mortgage may be very different from one lender to the next, as each lender sets its own underwriting guidelines. You may even be able to negotiate certain costs with a particular lender.

Next steps for comparing mortgage offers

Shopping for a mortgage is well worth your time, especially if you plan to remain in your home for the long term. Not sure where to start? Check out Bankrate’s mortgage rate tables, which let you plug in general information about your finances and location to receive competitive quotes and tailored offers. Compare your options and read each loan estimate you receive thoroughly to choose the best deal for you.

After you’ve compared loan estimates and settled on a lender, apply for mortgage preapproval: a written statement from the lender agreeing in principal to loan you up to a certain amount. Armed with this document — which shows sellers that you have financial resources at your disposal — you can submit an offer on home and negotiate a purchase. From there, you’ll formally apply for the mortgage and undergo the full underwriting process. And, hopefully, soon be at the closing table, securing the keys to your new home.

Additional reporting by Mia Taylor