How To Shop Your Mortgage Rate

My goal with this post is to help you shop your mortgage. Shopping for the best deal on ANYTHING we buy is something we ALL want to do. For some things that’s easier said than done. And in many cases, shopping your mortgage is one of those.

As a preface, it should be said that I don’t have a problem with a borrower who is wanting to shop around. Maybe that’s because I’m just a nice guy :). Or maybe it’s because I know how sharp my rates and fees are compared to my competitors. But ultimately – someone shouldn’t pay a ton of extra money upfront, or higher interest money just because. I find a lot of joy in helping people compare mortgage quotes and compare mortgage offers. And it should be known, that as much as the regulators have worked to unify the mortgage industry and have us using the same formats and naming fees the same – there is still A TON of differences from lender to lender. A borrower might reach out to three lenders for a quote and if a formal application wasn’t made, they might get a quote back in three different formats! This post is aimed at giving you the tools to accurately shop your loan. 

And one last thing. Is interest rate/fees all there is to a mortgage loan? Absolutely not! I would be doing a disservice if I didn’t also acknowledge the immense value in getting your loan done smoothly, on time, and without surprises. If you’re buying a home and have a 10-day deadline with the seller, and the cheapest offer can’t execute your loan that quickly, does it even matter? No. The loss you’d experience by using a loan officer or lender that can’t work within your deadlines is, in many cases, even larger than what you’re hoping to save by using that lender.

So I like this part of my job. I like helping people understand the differences when they go the route of getting multiple quotes. I even have a comparison sheet created that I give to people to help with this.

But there are a few things a borrower should know about mortgage rates when they’re attempting to shop their loan

  1) What makes up a “mortgage rate”?
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There is the rate itself. This is the note rate that the monthly payment is calculated off. And then there is the dollar cost of a rate. Any given rate may have an actual cost to the borrower in the form of “discount points” or “buying points.” Or a rate may have a rebate from the lender in the form of a “lender credit”. Lenders are able to offer rebates because of the interest collected over time. The higher the rate (and thus interest paid over time) the higher the potential rebate. The lower the rate (and thus lower interest paid over time) the higher the cost.

   2) How often can rates change?
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When a borrower receives a mortgage loan from a lender, the lender will wait until they have multiple similar types of loans and then group them all together to form a bond. These groups are then sold on the “bond market”. The price of these bonds on the bond market, specifically for mortgages the Mortgage-Backed-Securities bond market, is single-handedly the largest factor in mortgage rates. These bonds are purchased and sold by investors all day. And as these bond prices move up and down, it causes the Mortgage Backed Securities price to be reflected in mortgage rates. 

Let’s tie this together with our earlier point to make an example if a 6% rate involved neither an upfront discount cost nor a rebate from the lender, then a 5.75% might require a discount cost, and a 6.25% might result in a rebate from the lender. This part, the “cost” is almost guaranteed to change daily. And sometimes if the bond market moves a lot, it could change multiple times in a day. 

Over time, as these costs continue to move in one direction it will eventually cause a change in the effective rate. 

   3) What is a rate lock?
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A “lock” means that there is an agreement between the borrower and the lender regarding what the contract rate will be. The rate lock will also specify a date by which the mortgage must be closed and funded. A shorter lock time can result in a better “rate” for the borrower. But it is very critical that you understand the duration of your lock. Because if you fail to close before your lock expiration, it could become very costly to extend your lock. Especially if interest rates have gotten worse.

Those were some important housekeeping items. And it was skimmed quickly. So don’t hesitate to reach out with any questions. 

Now let’s get into the deep part of the pool, and the reason you’re probably here. How to shop your loan

Compare apples-to-apples.

What does this even mean? It’s simple. You should request your quotes with the

• Same program
  • You’ll do yourself a lot of favors comparing quotes for the same loan programs. Getting one quote for a 15-year loan and trying to compare it to another for a 30-year loan is useless. Or one quote for a conventional loan and another for a VA loan. 
• Using the same loan parameters 
  • Do you have to have your credit pulled or get pre-approved for your loan before getting a quote? No. But it is important to provide the same loan parameters to your prospective lenders. This includes, but is not limited to, your credit score, the loan amount, purchase price, property type, the lock duration, among other things..
• Prepared at the same time
  • Remember earlier in this article when we discussed how frequently rates can change? Because of that, it is critical to get your estimates at the same time. On the same day at a minimum. 
• Using the same interest rate
  • Since each rate has a different associated “cost”, an effective strategy to compare estimates is to have each lender quote the same rate. This leads right into the next point
• Then compare the difference in lender fees
  • Once you have estimates using all of the above tips, you will then easily be able to compare the difference in lender fees

Can my quote change before my rate is locked?
Again, with interest rates moving often, sometimes even multiple times per day, until your rate and lender fees are locked in, you may be subject to changes. The best way to combat this is to quickly obtain your quotes, compare the differences, and make your decision right away. You can then enter a discussion with your loan officer about when to lock in.

Lender fees vs non-lender fees
It is important to use lender-controlled fees when comparing quotes. There are a number of other settlement costs that may also appear on an estimate, but many of these are not controlled by your lender. These can include but are not limited to, title company charges, property taxes, homeowner’s insurance premium, and county recording charges. 

Why is it in so many formats?
As I said earlier, despite the best efforts of regulators, a mortgage rate quote may still come from multiple lenders in many different formats. This is where we can help you. We’ve developed an easy-to-use sheet to quickly compare lender fees side by side. Reach out today for help with this