Fstop123 | E+ | Getty Images
For homebuyers, it may seem like getting pre-approved once for a mortgage loan with terms you’re comfortable with is enough.
More than two-thirds (69%) of homebuyers only apply for one mortgage, according to a new report from Zillow.
But experts say you shouldn’t stop there. The average interest rate on a traditional 30-year mortgage was over 6.2% as of Friday, so even a half-point difference in interest rates can make a big difference for homebuyers. That’s because homebuyers are already facing soaring home prices and necessities like groceries, health insurance and utilities.
“In my experience, mortgage shopping is one of the most overlooked opportunities for consumers to improve their financial outcomes,” says Mike Casey, a certified financial planner and founder and president of AE Advisors in Alexandria, Virginia.
“Many borrowers default on the lender recommended by their real estate agent or their existing bank without comparing their options,” Casey says.
Average house price has increased by 45.8% since the beginning of 2020
Despite falling home prices and signs of a slowing economy, 30-year mortgage rates have generally ranged from 6.2% to 6.3% over the past two months, according to Mortgage News Daily. That’s down from nearly 8% in October 2023, but a far cry from the average of less than 3% in late 2020 and early 2021 during the pandemic, when demand and low interest rates began to send home prices soaring.
According to home buying site Zillow, the average price of a home in November was $359,241, up 45.8% from $246,326 at the beginning of 2020.
For buyers looking to buy beyond their budget, shopping around can make a big difference. Freddie Mac’s 2023 study noted that buyers can see a full percentage point difference between lenders.
“Interest rates can vary by institution, and closing costs can vary widely as well,” said Kevin Arquette, CFP, owner of WealthPoint Financial Planning in Lutz, Florida.
“That could make a huge difference during a 30-year term,” Arquette said.
Impact of lower interest rates on total interest expense
For example, a $360,000, 30-year mortgage with a fixed rate of 6.25% would have a monthly payment of $2,216.58, including principal and interest, but not including property taxes or homeowners insurance, according to Bankrate’s mortgage calculator. If you pay that amount every month over the life of your loan, you’ll end up paying more than $437,969 in interest.
If your interest rate was just 0.5 points lower on a 5.75% loan, your monthly principal and interest payments would be $2,100.86, a difference of $115.72. Interest paid over the life of the loan totals $396,310, a savings of $41,659.
Also pay attention to closing costs
When it comes to estimated closing costs, it’s important to understand what will be covered and whether there are any negotiable costs when shopping around.
Closing costs are what you pay at the settlement table and cover things like title insurance, property taxes, lender fees, and so-called points you’re paying. Points are 1% of the sales price, and paying points often results in a lower mortgage rate than you would otherwise have.
Arquette said lenders may be able to help you decide whether a lower interest rate and higher closing costs are right for your situation by showing you how much the loan would be repaid over, say, five years under different scenarios.
How to minimize the impact on your credit score
When applying for a mortgage pre-approval, keep in mind that lenders will typically check your credit report as part of the process. This “hard scrutiny” will temporarily lower your score by several points.
But Margaret Poe, director of consumer credit education at TransUnion, one of the three major credit bureaus, said multiple mortgage applications don’t necessarily appear on credit reports as separate inquiries.
“For example, if you apply for three different (loans) and do a rating shop, all three inquiries will show up on your credit report, but the credit scoring model will only count them as one inquiry,” Poe said.
The key is to apply relatively nearby. Poe said there is usually a 45-day grace period, but some credit scoring models allow only 14 days.
“If your goal is to limit the impact on your credit score, you may want to consider submitting all mortgage applications within 14 days,” she says.
