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For homebuyers, getting one preapproval for a mortgage that has palatable terms may seem good enough.
More than two-thirds — 69% — of homebuyers submit only one mortgage application, according to a new report from Zillow.
However, you shouldn’t stop there, experts say. 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 average home price is up 45.8% from early 2020
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.
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.
How a lower rate impacts total interest paid
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. If you were to pay that amount monthly over the life of the loan, you would end up forking over $437,969 in interest.
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.
Pay attention to closing costs, as well
As for the estimated closing costs, it’s important to understand when shopping around what’s covered and if any of those expenses are negotiable.
Closing costs are what you pay at the settlement table and cover things like title insurance, property taxes, lender fees and any so-called points you are paying. A point is 1% of the sale price, and paying points often comes with a mortgage rate that’s lower than what you’d get otherwise.
Your lender may be able to 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 will have paid off in, say, five years under different scenarios, Arquette said.
How to minimize the impact on your credit score
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.
“For example, if you rate-shop by applying for three different [loans], all three inquiries will appear on your credit report, but the credit-scoring models will only count them as a single inquiry,” Poe said.
The key is to apply for them relatively close together. You typically get a 45-day window, but some credit scoring models allow just 14 days, Poe said.
“If your goal is to limit the impact to your credit score, you may want to consider submitting all your mortgage applications within a 14-day period,” she said.