Most homebuyers don’t shop around for mortgages. Why that’s a bad idea
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For home buyers, getting a pre-approval for a mortgage with acceptable terms may seem good enough.
More than two-thirds (69%) of homebuyers apply for just one mortgage, according to one study. new report From Zillow.
But experts say you shouldn’t stop there. Average interest rate on a traditional 30-year mortgage Sitting above 6.2% Starting Friday, even a half-point difference in rates could be a game-changer for some home buyers already facing high home prices and other necessary expenses like food, health insurance and utilities.
“In my experience, shopping for a mortgage is one of the most overlooked opportunities for consumers to improve their financial outcomes,” said certified financial planner Mike Casey, founder and president of AE Advisors in Alexandria, Virginia.
“Many borrowers default on the lender recommended by a real estate agent or their current bank without comparing alternatives,” Casey said.
The average house price increased by 45.8% compared to the beginning of 2020
On the contrary Interest rates on 30-year mortgages have largely remained in the 6.2% to 6.3% range over the past two months due to weakening home prices and signs of an economic slowdown. According to Mortgage News Daily. While it’s down from about 8% in October 2023, it’s a far cry from the sub-3% average seen in late 2020 and early 2021 amid the pandemic, when home prices began to soar in part due to demand and lower rates.
The median price of a home in November rose 45.8% to $359,241 from $246,326 at the beginning of 2020, according to home-buying site Zillow.
For buyers stretching their budgets to make the purchase, shopping around can make a big difference. A. 2023 research from Freddie Mac He noted that buyers can see a percentage point difference between lenders.
“Rates can vary between different lenders, and closing costs can also vary significantly,” said Kevin Arquette, CFP, owner of WealthPoint Financial Planning in Lutz, Florida.
“This could make a huge difference over a 30-year period,” Arquette said.
How does a lower rate affect the total interest paid?
For example: Monthly payment for a $360,000 30-year mortgage with a 6.25% fixed rate – including principal and interest but not including property taxes or homeowners insurance – will be $2,216.58 according Bankrate’s mortgage calculator. If you were to pay this amount monthly for the life of the loan, you would have to pay over $437,969 in interest.
A loan with an interest rate just half a point lower, 5.75%, would mean a monthly principal and interest payment of $2,100.86; that’s a difference of $115.72. The total interest paid over the life of the loan will be $396,310, meaning a savings of $41,659.
Pay attention to closing costs too
When it comes to estimated closing costs, it’s important to understand when researching what’s covered and whether any of these expenses are negotiable.
Closing costs are the amount you pay at the settlement table and include things like title insurance, property taxes, lender fees, and points you pay. One point is 1% of the sales price, and points usually come with a lower mortgage rate than you would otherwise get.
Arquette said your lender can help you determine whether a lower rate with higher closing costs makes sense for your situation by showing you how much of your loan you’d pay off under different scenarios, such as in five years.
How to minimize the impact on your credit score?
Keep in mind that if you apply for a mortgage pre-approval, the lender will usually check your credit report as part of the process. This “hard inquiry” will cause your score to temporarily drop a few points.
However, applying for multiple mortgages won’t necessarily show up as separate questions on your credit report, said Margaret Poe, head of consumer credit education at TransUnion, one of the three major credit bureaus.
“For example, if you are shopping by applying for three different [loans]“All three inquiries will appear on your credit report, but credit scoring models will only count them as a single inquiry,” Poe said.
The important thing is to apply relatively close to each other. Poe said you typically have a 45-day window, but some credit scoring models only allow 14 days.
“If your goal is to limit the impact on your credit score, you may want to consider submitting all mortgage applications within a 14-day period,” he said.
