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How to shop for a mortgage.

The mortgage industry has come a long way in simplifying the process of getting a mortgage, many now have customer friendly application portals, and documenting your income and assets has become automated in the digital age, but one thing that hasn’t changed is how difficult it is to shop for the best interest rate and lowest mortgage closing costs.

Comparing mortgage rates and closing costs is a moving target.  The most important thing to realize when shopping for a mortgage is that interest rates change every day and can even change twice per day when financial markets are volatile.  The following are the best steps for shopping for the best mortgage rate with the lowest closing costs.

  1. Narrow your search to three lenders that you are most comfortable with
  2. Determine what each charges in direct mortgage closing costs (lender origination fees)
  3. Decide on the exact date you intend to apply for your mortgage

Let’s Dig a Bit Deeper.

Step 1.

There are a few things you should consider when choosing a mortgage lender.  It’s important to know how well qualified you are and the type of mortgage your need before selecting a lender.  For example, if you’re a high net worth customer looking for a large mortgage, you’re likely better off working with large commercial banks.  Conversely, if you’re a first-time homebuyer with a lower credit score, you will find more success with mortgage bankers, or independent mortgage brokers.  While getting the best interest rate with the lowest closing costs is important, I think you’ll agree, finding a lender who will actually lend you the money and close on time is the first order of business.  You should also not overlook working with a loan officer you are comfortable with, most importantly, someone who is ethical, honest, dedicated, and looks out for your best interest.  In short, work with people you trust, or those referred by a friend or real estate professional.  Once you’ve defined the best type of lender to work with, and the loan officers you trust, narrow down your search to 2-3 lenders.

Step 2.

There are over 20 line item fees you are charged for mortgage closing costs, which is outlined in a document the lender must give you, called a Loan Estimate.  You may request a loan estimate before applying for a mortgage, but most lenders will only give it to you when your formal application is submitted (the government requires this within 3 business days of your application).  It’s important to understand that the interest rate and the closing costs aren’t mutually exclusive.  That’s to say, a lender can make money by the interest rate they charge you, or the loan origination charges on your Loan Estimate, or a combination of both.  For example, a lender may charge a low interest rate but make it up by charging more in closing costs.  Conversely, your lender may have lower closing costs, but the interest rate is higher.  We advise you to ask your lender what their direct loan origination charges are and compare them to the three lenders you have chosen to work with.  You can then determine who has the best combination of a low rate and fees.

Step 3.

This is the most critical step.  Interest rates are subject to change everyday, this is what makes it so difficult when shopping for a mortgage.  You might have received a rate quote from one lender on a Friday and another on the following Wednesday.  Let’s say the lender who quoted you a rate on Wednesday was lower than the rate another lender quoted on the previous Friday.  You might think the  “Wednesday Lender” has better rates, but this might not be the case if interest rate came down from the time the “Friday Lender” quoted their rate. It’s fine to get several quotes when shopping for a mortgage, but narrow your search to 3 lenders that have quoted comparable loan origination charges, and rates that are within .125% of each other.   When you are getting ready select your lender and submit your formal  mortgage application, tell your three lenders the date you intend to apply and ask them to provide you with the best rate they can offer on that day.