This year’s housing market is competitive. Prices are up, and houses are selling fast, though rising interest rates may slow the market down.
If you are looking to buy a new home, you need to be prepared. Prospective buyers can make their offer more competitive by getting preapproved for financing before even bidding on a house. This lets sellers know that a buyer is serious and provides reassurance that the sale will close without issues.
That means many prospective home buyers are shopping for a mortgage lender before finding the right home. To get the best deal, be sure to compare all the costs and understand how mortgages work. Fortunately, shopping around, comparing prices, and negotiating deals can save you thousands of dollars.
How to Shop for a Mortgage Lender
Whether you are buying a home, refinancing your home, or taking out a home equity loan, follow these tips to help make your search for a mortgage lender a success.
- Know how much you can spend upfront. Before you ask for information from a lender, it’s a good idea to know how much you can spend on a loan and the maximum monthly payment you can afford. This information will be a key part of your negotiations, so review your budget ahead of time.
- Get to know your loan options. Loan options include loan terms, interest rate type, and the loan type. The loan term refers to the length of the loan, which may be 15 or 30 years. Shorter loans usually have higher monthly payments with lower interest rates. Interest rate types may be fixed or adjustable. Fixed rate loans are lower risk but carry higher interest rates. Adjustable rate mortgages (ARMs) have lower interest rates to start, but the rates can change over time. Loan types may be conventional or part of a government program. Understanding the options will help you choose the best loan for your situation.
- Understand the difference between a broker and a lender. According toConsumerFinance.gov, a lender is a bank or other financial institution that loans money directly to you. A broker acts a middleman, comparing loan options on your behalf. The Federal Trade Commission adds, “Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers’ advertisements do not use the word ‘broker.’ Therefore, be sure to ask whether a broker is involved.” You’ll want to know, since brokers are usually paid a service fee separate from the lender’s fees.
- Get information from multiple lenders and brokers before making a decision. Get as much information from each lender as you can. Keep your options open to begin with, since different lenders may offer different rates, advises the FTC. Make sure you ask about interest rates, loan types, annual percentage rates, points, down payments, mortgage insurance, and all other fees. This will help you get a clear view of the actual cost of the mortgage.
- Understand whether you should pay points. Your mortgage lender will likely give you the option of paying for discount points. Mortgage points are fees you pay a lender to reduce the interest rate on a mortgage. Typically, one discount point is equally to 1% of the mortgage amount and will reduce your interest rate by .25%. Depending on how long you plan to keep your home and your mortgage, this extra cost may or may not make sense. This calculator will help you figure that out.
- Working with a broker? Make sure they find you the best deal. If you prefer to hire a broker to do the shopping for you, know that while brokers have access to several lenders, they aren’t obligated to find the best deal for you unless they sign a contract to act as your agent.
- Be prepared to negotiate the best deal. Loan officers and brokers are allowed to keep some or all of the overages (the difference between the lowest available price and any higher price you agree to pay) of a loan as extra compensation. This means you may be able to negotiate a price lower than what they initially offer you. The best way to negotiate is to have the broker or lender give you a written list of all of the costs and fees included in the loan. Then, ask if they will reduce or waive completely one or more of the fees. You can also show them a competitor’s offer to see if they will give you a better deal.
- Watch out for scams. Shopping around for a mortgage lender will help you get a general idea of how much a loan costs, which will help you spot and avoid any offers that seem too good to be true. Be wary of unsolicited calls and emails offering you great rates on a mortgage or “no-cost” loans. Never give in to high pressure sales tactics. ConsumerFinance.gov warns about a phishing scam where con artists attempt to divert your closing costs and down payment by suggesting, right before your loan closes, that you wire the money into a fraudulent account.
Visit the Consumer Finance Protection Bureau’s mortgage page to learn more about how mortgages work. Learn about reverse mortgages by reading the BBB Tip: Understanding Reverse Mortgages.
When shopping for a lender, always look for businesses that follow BBB Accreditation Standards.
Search for a reputable mortgage lender near you.