Mortgage Rates: You'd Better Shop Around

Nearly half of mortgage consumers don’t shop around for a mortgage, according to the Consumer Financial Protection Bureau (CFPB), the Federal agency responsible for regulating the mortgage industry. A CFPB survey of 5,000 people who got a mortgage in 2013 showed that 47 percent of consumers considered only one lender before deciding where to apply, 77 percent of consumers actually applied with only one lender, and rates on a 30-year fixed conventional (non-FHA) loan varied by more than 0.5 percent among lenders.

That rate variance alone is reason enough to shop around for the best mortgage rate. Here’s some guidance on common questions from rate shoppers.

How long should I shop for a mortgage?

Rates change throughout each day as mortgage bonds trade. Before the 2008 financial crisis, it was considered highly volatile for rates to move up or down .125 percent in a week. Now rates can rise and fall as much as .25 percent in a day.

To compare lenders accurately, you must get quotes from all lenders on the same day. If you’re buying a home, you will need to get those quotes before each home offer you make. You’ll do this until a seller accepts your offer, at which time you must select a lender. If you’re refinancing, you’ll compare lenders’ quotes each day until you lock a rate with one of them.

How do I know if a quote is accurate?

There is a direct relationship between rates and closing costs. The higher your closing costs, the lower your rate, and vice versa.

As such, the CFPB requires lender rate quotes to include all line-item closing costs and annual percentage rate (APR), which shows what the rate would be if the fees were built into the rate.

When you get your quotes from your various lenders, make sure you’re comparing rates with fees and APRs. One rate might be lower because fees (and corresponding APR) are higher. You won’t know which lender is most competitive until you see all the fees and the APR from each lender on the same day.

How much home purchase rate shopping is enough?

A rate lock must be for a specific property. You can’t lock a rate for a home you’re buying until you’re in contract to buy it. This means you’ll have to shop rates for the duration of your home shopping.

And it’s not just about the rate — it’s about your lender’s ability to perform on time. There will be a contract between you and the seller that requires you to have formal loan approval, appraisal, and closing done in specific time periods.

These periods are days, not months, so you must shop in advance, and let the one or two lenders with the best rates (and fees) get your loan underwriting approved, or at least allow the loan officer to pre-approve you.

Underwriter approval is the best way to get your offer accepted by a seller because it’s an actual loan commitment. The pre-approval isn’t a loan commitment, but still carries some credibility with sellers if they know your loan officer or lender.

In both processes, you must let the lender(s) run your credit report, and provide all documentation they request — but neither process obligates you to use that lender.

How much refinance rate shopping is enough?

People often start shopping for refinances because rate markets have improved. Other homeowners start the process because they want cash out of their home to make improvements, or to change an adjustable rate mortgage (ARM) to a fixed rate.

Whatever the reason for your refinance, you’ll follow the same process — get full rate/fee quotes from lenders on the same day, compare, and choose the option you’re most comfortable with from a pricing and service standpoint.

What if rates drop after I lock my mortgage?

Each lender has its own policy on “rate renegotiations” for locked purchase and refinance loans. Most lender policies will give you about half of a rate market dip when renegotiating a locked rate.

For example, if you locked a loan at 3.75 percent and rates dropped to 3.5 percent, you could likely renegotiate your rate to 3.625 percent. When shopping, ask each lender to explain their locked rate renegotiation policy and terms.

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