For homebuyers, getting one preapproval for a mortgage that has palatable terms may seem good enough. However, experts say that this approach can be detrimental to their financial well-being. More than two-thirds — 69% — of homebuyers submit only one mortgage application, according to a new report from Zillow. This lack of shopping around can result in missing out on better interest rates and terms that can save them thousands of dollars in the long run.
Understanding the Importance of Shopping Around
With the average interest rate on a traditional 30-year mortgage sitting above 6.2% as of Friday, even a half-point difference in the rate can be a game-changer for some homebuyers, who already face elevated prices on housing and other necessary expenditures like groceries, health insurance, and utilities. “In my experience, shopping around for a mortgage is one of the most overlooked opportunities for consumers to improve their financial outcome,” said certified financial planner Mike Casey, founder and president of AE Advisors in Alexandria, Virginia. “Many borrowers default to the lender recommended by a real estate agent or their existing bank without comparing alternatives,” Casey said.
The Current State of the Housing Market
Despite weakening home prices and signs of economic slowing, rates on 30-year mortgages have largely remained in the 6.2% to 6.3% range over the last two months, according to Mortgage News Daily. While down from nearly 8% in October 2023, it is a far cry from the below-3% average seen in late 2020 and early 2021 amid the pandemic, when home prices began skyrocketing due in part to demand and low rates. The average price for a house in November was $359,241, a 45.8% jump from $246,326 at the beginning of 2020, according to home-buying site Zillow.
The Benefits of Comparing Mortgage Rates
For buyers who are stretching their budget to make the purchase, shopping around can make a big difference. A 2023 study from Freddie Mac noted that buyers could see a full percentage-point difference among lenders. “Rates can vary between different lending institutions, and closing costs can vary dramatically as well,” said CFP Kevin Arquette, owner of WealthPoint Financial Planning in Lutz, Florida. “That can make a big difference over the course of a 30-year term,” Arquette said. For illustration: On a $360,000 30-year mortgage with a 6.25% fixed rate, the monthly payment — including principal and interest but not property taxes or homeowners insurance — would be $2,216.58, according to Bankrate’s mortgage calculator.
Understanding Closing Costs and Credit Score Impact
A loan with a rate just a half-percentage point lower — at 5.75% — would mean a monthly principal and interest payment of $2,100.86 — a $115.72 difference. Over the life of the loan, interest paid would total $396,310 — a savings of $41,659. As for the estimated closing costs, it’s essential to understand when shopping around what’s covered and if any of those expenses are negotiable. Be aware that if you do apply for a mortgage preapproval, the lender generally will check your credit report as part of the process. This “hard inquiry” will cause your score to go down a few points temporarily. However, multiple mortgage applications don’t necessarily hit your credit report as separate inquiries, said Margaret Poe, head of consumer credit education for TransUnion, one of the three major credit bureaus.
Conclusion and Further Reading
For more information on the importance of shopping around for mortgages, you can read the full article Here
Smart Tip for Readers
When shopping for a mortgage, consider submitting all your applications within a 14-day period to minimize the impact on your credit score, and be sure to compare not only interest rates but also closing costs and other terms to find the best deal for your financial situation.
