People are creatures of habit, and we like to shop at places we’re familiar with and where we’ve had good experiences — whether buying groceries, furniture, or a car. However, when it’s time to shop for a mortgage to buy or refinance a home, we often go straight to our regular bank without taking the time to look at other options.
That can be a costly mistake.
Screening Multiple Lenders is Essential
Mortgage rates vary from lender to lender, but competition for your business is fierce — so with a little legwork, you can find the best deal for the loan type and term you want.
Your local bank is always an option, but savings and loans, credit unions, nonbank financial companies, and online lenders have changed the landscape considerably.
If you’ve already got a relationship with a bank, they know the value of your business and may offer a discount if you use them for other services such as checking and savings accounts or retirement investments.
Another option is using a mortgage broker. Brokers aren’t tied to a specific lender, and their relationships can often match you with better rates than you might secure on your own.
However, lenders usually pay brokers commissions, which can create a conflict of interest — potentially steering you toward products that pay them better, even when other options may be more suitable for you.
One effective strategy is to ask people you trust for referrals — friends, family members, business associates, your accountant, an attorney, or a real estate agent.
Don’t Worry About Too Many Credit Inquiries
If you contact multiple lenders during your search, you may need to go through a soft credit check to see what you qualify for.
Mortgage shoppers generally aren’t penalized for multiple credit inquiries because the credit bureaus can recognize when someone is rate-shopping for a home loan. Multiple inquiries that might otherwise ding your score are typically treated as a single inquiry if they occur within a narrow timeframe — generally a 30-day window.
On a related note, it’s smart to check your credit profiles through Experian, Equifax, and TransUnion early in the homebuying process. Your risk profile is determined in part by your FICO score, and you want to make sure it’s as high and as accurate as possible before reaching out to lenders.
Start as early as six months before you shop — that gives you time to identify and address any issues that could be dragging down your score.
The Potential for Big Cost Variations
You may end up with the best terms from your current bank — but the odds are against it. There’s enough variety in the rates and terms offered by different lenders that it would take a real stroke of luck for your regular bank to have the best deal for your specific situation.
Given the size and length of a typical mortgage, even small differences in terms can add up to significant money over time. When you consider that, it’s surprising that more borrowers aren’t aggressive about shopping around.
That said, interest rates are only one variable to consider. Other costs worth comparing include the following.
Fee Structure
All mortgages come with fees known as closing costs — charges that cover expenses associated with the loan, such as legal filings, credit reports, origination fees, and more.
This is how loan originators make their money, since they typically sell the loan to investors shortly after closing. The investors are the ones who collect interest over the long term.
The amount and type of fees vary from lender to lender. One lender may charge for something another doesn’t, or may bundle several services under a single fee that another lender itemizes separately.
In some cases, you may also be able to negotiate with the seller to cover a portion of the fees associated with the purchase.
No Closing Cost Loans
That’s an attractive label, but the loan still has a cost. In these cases, closing costs are either rolled into the loan amount or covered by a slightly higher interest rate. You’re still paying them in the long run — but for borrowers who want to minimize upfront out-of-pocket costs, this structure can make sense.
Discount Points
Most lenders will allow you to buy a lower interest rate by paying for points. Each discount point costs 1% of the loan amount and typically reduces your rate by one-eighth to one-quarter of a percent.
When comparing offers, start by comparing quotes with no points included — that makes it easier to evaluate the base costs and rates on equal footing. You can then factor in points separately if you want to explore the trade-off.
Down Payment
Down payment requirements can vary from lender to lender. One lender may require 10% down based on your profile and the property, while another may allow as little as 5%.
Fannie Mae and Freddie Mac have a program that allows as little as 3% down on 30-year loans for borrowers with good credit — though not all lenders offer this product.
If you’re looking for a minimal down payment without going the FHA route, your regular bank may not have that option available.
Flexibility
Rates and terms can shift, so once you’ve started the application process, it’s worth asking how much flexibility you have if conditions move in your favor.
Some lenders allow a one-time rate adjustment if rates fall after you’ve locked in, though some charge a fee for this. Others won’t allow changes to a locked rate under any circumstances.
Loan Programs
Your regular bank isn’t likely to highlight mortgage options they don’t offer — they want your business. But other lenders may carry products that better fit your needs.
One example is the USDA Rural Development Loan. Few lenders offer them, and you generally need to contact your local USDA office to get a list of participating lenders. But if you’re a first-time homebuyer who meets the income limits and other qualifications, these no-money-down loans are hard to beat.
Another example is portfolio loans — mortgages that a lender keeps on their own books or sells directly to investors rather than routing through Fannie Mae, Freddie Mac, the FHA, or another agency. Because the lender sets their own guidelines, portfolio loans can offer greater flexibility for borrowers who have difficulty meeting standard agency requirements.
These loans are often popular with business owners who have difficulty documenting income or prefer not to open their books to outside scrutiny, but can demonstrate creditworthiness in other ways.
Additional programs are also available through the VA or for borrowers who have gone through bankruptcy and returned to solid financial footing.
Choosing a Lender
When shopping for a mortgage, start by casting a wide net — large banks, community banks, credit unions, online lenders, nonbank lenders, and mortgage brokers. See what terms each is offering before narrowing your list.
Narrow it down to two or three of the most suitable options and ask each for a detailed quote and full cost breakdown. Submit your requests on the same day — ideally back to back — so you know everyone is working from the same market rates, which can shift every few hours.
You may even want to submit a full application to each, which requires them to respond with a formal Loan Estimate breaking down all costs in a standardized format.
If you’re ready to see what you qualify for, start your application with Refi.com today. We specialize in refinancing and home purchase loans and can help you find the right fit for your financial situation.
