Can You Shop Around for Mortgage Rates to Save on Your Home Loan?

When you’re buying a home, getting a mortgage may seem like just another task to complete. Your monthly payments will depend on the type of loan, loan term, creditworthiness, and other factors. The decision will have a lasting impact on your financial state for years. Even in a competitive market, mortgage offers can vary significantly. You can only know whether you’re getting a good deal if you compare. 

 To pick the best lender for you, you’ll need to decide what kind of loan you’re looking for and the lending experience you expect. You’ll want to shop around for mortgage rates and determine the best lending institution for your needs. 

Understanding the Types of Mortgages

A mortgage allows you to borrow money to purchase a home, land, or other real estate. You need a mortgage to buy real estate without paying the entire purchase price upfront. By taking out a mortgage, you agree to repay the loan, plus interest, over a specified number of years. If you don’t make payments on time, the lender has the right to take the property.

Mortgages come in all shapes and sizes to appeal to many borrowers’ needs. But with so many options, finding the ideal fit for you may feel daunting. The type of loan will impact your down payment, interest rate, mortgage insurance, and what you can afford in a house. The best option is one that matches your financial goals. 

Common mortgage types are: 

  • Conventional Loans. The federal government doesn’t back conventional loans. Instead, a private lender such as a bank, credit union, or other financial institution provides financial support. Conventional loans offer you lower interest rates and more favorable loan terms. But because the lender takes on greater risk, conventional loans typically have stricter credit requirements. Traditionally, these loans require 20% or more as a down payment and a higher credit score. 
  • FHA Loans. These Federal Housing Administration-backed loans are easier to qualify for and are particularly popular with first-time homebuyers. Loans require a smaller down payment, and applicants may have lower credit scores. But these benefits come with drawbacks. There is a limit on the amount you can borrow. The max loan amount varies by area, and the home must be your primary residence. Unless you make a down payment of 10% or more, you will need to pay mortgage insurance for the term of the loan.
  • VA Loans. Eligible veterans, current servicemembers, or surviving spouses have loan options for their primary residence through the Department of Veterans Affairs. These government-backed loans offer an opportunity of no down payment, less restrictive credit score and income requirements, and no private mortgage insurance payment.
  • USDA Loans. USDA loans are government-backed options requiring zero down payment for eligible rural areas. To qualify for a USDA loan, you must meet the Department of Agriculture’s geographic and income eligibility standards.

Can You Shop Around for Mortgage Rates?

Because the better the deal you get on your mortgage, the less money you’ll spend repaying that loan, your goal should be to secure the lowest mortgage rate possible. The stronger you are as a home loan candidate, the more likely you will get a great offer from a lender. 

Check Your Credit Scores and Credit Report

Your credit score and credit report are significant factors in the mortgage process. They affect both your application approval and the interest rate you pay.

Your credit report provides a snapshot of your credit history, including the type of credit accounts you’ve had in the past and your payment history. There are three consumer reporting agencies: Equifax, TransUnion, and Experian. Each report includes your payment history and current credit accounts. You can check your report with each reporting organization annually at no charge. Checking your credit report can help ensure your information is accurate and complete. 

Your credit score is a three-digit number, typically between 300 and 850, representing your overall credit risk. So, what’s a good credit score? Generally, higher credit scores demonstrate a history of using credit responsibly, and lower ones reflect a need to improve your financial habits. 

Understand the Types of Mortgages

The interest rate you pay will significantly impact your monthly payment. You’ll want to crunch the numbers and map out your mortgage affordability to shop effectively. When shopping rates, there are a couple of terms you’ll want to understand. 

Two mortgage rate terms to understand:

  1. Fixed Rate Mortgage. With a fixed-rate mortgage, your interest rate won’t change during the loan term, typically 10, 15, 20, or 30 years. The longer the duration of your loan, the lower your monthly payments will be, but the more you’ll pay in total interest over the life of the loan. A fixed-rate loan protects you from increases in your mortgage payments if interest rates rise. And knowing your monthly mortgage payment is consistent makes budgeting easier. The downside to fixed-rate mortgages is the interest rates are higher than adjustable-rate loans translating to higher monthly payments, and qualifying for this type of loan is more difficult because the payments are less affordable.
  2. Adjustable-Rate Mortgage (ARM). With an adjustable-rate mortgage, also called variable-rate or floating-rate mortgage, the interest rate is fixed for an initial term, after which the interest rate can change. These mortgages have risks, but they come with a significant advantage. The initial interest rate is often below the market rate, making the mortgage more affordable in the short term. But the rate will likely increase after the initial period, usually around five years. ARMs are a good option if you plan to repay the loan, sell the home, or refinance before the interest rate resets.   

Shop Multiple Lenders

Because mortgage offers vary from lender to lender, shopping around can allow you to save money. Start with a financial institution with which you already have a relationship. In addition to knowing you, they may have special offers for established customers. Ask for recommendations from friends who recently bought a house or are shopping themselves.  

When comparing loan offers, look at: 

  • Rates. Lenders set their own interest rates. You’ll find different rates at various lending institutions. A lower rate translates to a lower mortgage payment, saving you money.
  • Closing Costs. These are the fees charged to finalize your loan. Lenders generally have flexibility in setting costs. Some lenders may be willing to negotiate closing costs.
  • Mortgage Points. Mortgage points, sometimes called “discount points,” are fees you pay to lower your home’s interest rate. Purchasing a point means you’re prepaying the interest to have a smaller monthly payment. Each point you buy costs 1% of the loan amount and reduces the interest rate by 0.25%. 

Mortgage Rate Shopping FAQs

You may be filled with questions when you start shopping for a mortgage. Knowing the answers to common questions will put you ahead of the game, and they will help you find the best loan and the right lender.

When Should I Start Mortgage Shopping?

Shop for a mortgage before looking at homes. Getting pre-approved saves you valuable time by identifying how much you can afford. You’ll be able to target homes based on your price level. Also, your real estate agent likely will want you to be preapproved before they start searching for the right home for you.

A pre-approval helps speed up the closing process since much of your financial information is already in the lender’s system. Keep in mind a pre-approval typically lasts for 60 to 90 days. Plan accordingly.  

How Many Places Should You Shop for a Mortgage?

You can shop around as much as you want for mortgage rates. Experts recommend comparing three to five mortgage lenders. You could save an average of $1,500 over the life of a loan by gathering one additional quote from a lender. By gathering five quotes from lenders, research shows you can save up to $3,000. 

Does Mortgage Shopping Hurt Your Credit?

Credit checks can be hard or soft inquiries. Soft inquiries occur when a rental agency or company checks your credit. An employer might run a soft query before hiring you. Hard inquiries occur when a lender or credit card issuer checks your credit to see if you’re a good loan candidate. Each mortgage application you submit will result in a hard credit inquiry. A hard query temporarily lowers your credit scores by a few points, but it won’t affect your score long-term. Also, agencies allow for rate shopping between 14 to 45 days without damaging your credit score.

Do First-Time Home Buyers Get Lower Mortgage Rates?

First-time home buyers don’t get lower interest rates just because they’re new to the market. But as a new owner, you may qualify for local and national first-time home buyer assistance programs, which can help cover all or part of your down payment, closing costs, or special interest rates.

For example, the Oklahoma Housing Financing Agency offers eligible borrowers who are teachers, law enforcement officers, firefighters, or state employees reduced mortgage interest rates and down payment assistance equal to 3.5% of the total loan amount. 

How is My Mortgage Rate Determined?

When determining your mortgage rate, lenders will look at your overall financial situation, current and past. Your credit score, payment history, and current economic conditions will all play a part in your payment. In addition, they will look at your employment history, income, other debt, loan size and terms, down payment, and loan type. 

How Focus Federal Can Help

Whether you’re refinancing or buying a new home, it makes smart financial sense to shop for your mortgage rate. Focus Federal Credit Union can discuss your options concerning rates and payments. Contact Focus today to learn more about loan programs available.