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- Borrowers can save more than $1,200 per year when rates are high by shopping around for a mortgage, according to Freddie Mac.
- Mortgage shoppers should aim to get approved with at least four lenders to see the biggest savings.
- Try to request all your rate quotes around the same time so you get an accurate comparison.
Over the last year, mortgage rates have increased more than three percentage points, pushing the average monthly mortgage payment up by hundreds of dollars.
High rates have seriously slowed homebuying demand, as many would-be buyers wait it out in hopes of lower rates in the coming months and years. But for those who are buying now in spite of high rates, getting preapproved with multiple mortgage lenders is one way to can keep costs to a minimum.
It’s advice that’s repeated ad nauseam to new homebuyers: shop around for your mortgage by getting preapproved with multiple lenders. Though juggling multiple mortgage applications can seem like a lot of work when you’re already going through the stress of buying a home, it’s advice that can save you a significant chunk of money.
And, as researchers from mortgage investor Freddie Mac found, it turns out that the higher rates are, the more important shopping around becomes.
According to a report released last month, applying for mortgage preapproval with multiple mortgage lenders can save borrowers between $600 and $1,200 each year when rates are high.
As rates rose in 2022, borrowers saw greater variation in the rates lenders were offering
Freddie Mac’s research found that when rates were lower between 2010 and 2021, applying with two different lenders reduced a borrower’s rate by an average of 10 basis points, or 0.10 percentage points. But as rates soared in 2022, borrowers saved an average of 20 basis points by shopping around.
“The increase in rate dispersion means that consumers with similar borrower profiles are being offered a wide range of mortgage rates,” Genaro Villa, macro and housing economics professional for Freddie Mac, said in the research brief. “In the context of today’s rate environment, although mortgage rates are averaging around 6%, many consumers that fit the same borrower profile could have received a better deal on one day and locked in a 5.5% rate, and on another day locked in a rate closer to 6.5%.”
This means that borrowers could earn significant savings just by getting rate quotes from more than one lender. So the silver lining to higher rates is that the rates available from different lenders vary more than they do when rates are lower.
Talk to at least 4 lenders to see the biggest savings
Mortgage rates were especially high in October and November 2022, climbing up past 7%. During this time, borrowers who got two rate quotes could have saved up to $600 per year, according to the Freddie Mac research. But those who talked to at least four lenders could potentially have saved more than $1,200 per year.
“Another way to look at the cost savings is from a cumulative perspective,” Villa said. “Borrowers who received as many as five rate quotes during the second half of 2022 could have potentially saved more than $6,000 over the life of the loan, assuming the loan remains active for at least five years. That makes a difference.”
Shopping around with multiple lenders doesn’t just mean applying with the first handful of mortgage lenders you come across. Here are some strategies to make sure your rate shopping experience is successful.
1. Apply with lenders that suit your needs
It’s important to do your research first and understand which types of lenders are best for you. A good lender will offer the type of loan you’re looking for and have features that are attractive to you.
For example, if you prefer a digital experience, you might want to apply with a few online mortgage lenders.
2. Check their reputations
You want to make sure you’re applying with reputable lenders.
“Consider the expertise and credibility of the mortgage lender, not just the lowest rates,” says Shashank Shekhar, founder and CEO of InstaMortgage. “Google them to see if they have been covered favorably in the media.”
3. Time your shopping right
Kristina Morales, a mortgage loan officer and founder and chief finance contributor at Loanfully, says that comparing rates when you’re early in the process can be tricky.
“Unless they are pulling rates at the exact same time, it may not be apples-to-apples,” Morales says. “So if you are shopping rates, try and sit and do it all at the same time to get the best indicator of rate differences.”
Morales recommends getting preapproved with multiple lenders and, once you’re under contract on a home, asking for a rate from each lender on the same day to ensure you’re getting the most accurate picture of how each lender differs.
4. Don’t just consider the rate
Just because you can get a good rate from one lender doesn’t mean your overall costs will be lower with that lender.
Mortgages come with a lot of different fees that you’ll pay as part of your closing costs. Some of these fees are charged directly by your mortgage lender, and different lenders charge different fees.
You’ll also want to understand how your estimated costs could change by the time you’re at the closing table.
“The loan officer will provide you with a loan estimate (LE) with details of your closing costs. But it’s just an estimate and can change at closing,” Shekhar says. “So, ask the loan officer to explain every single item on the LE and ask which ones can increase at closing. Understand why they would increase and how much they can increase.”
5. Ask about points
“When comparing interest rates, be sure to ask if they are charging any ‘points’ to get to that rate,” Morales says.
Mortgage points, or discount points, let borrowers pay to lower their interest rate. While you’ll pay more at closing for these points, you’ll benefit from paying less in interest over the life of the loan.
As you compare rates between lenders, make sure you’re making an equal comparison. Lenders may quote you at a certain rate that has points included, meaning you’ll pay extra for that rate at closing.
“A borrower can literally spend thousands of dollars more by only asking for the rate and not about any points,” Morales says.
