How to Compare Mortgage Lenders & Interest Rates

Buying a home is one of the biggest financial decisions you’ll ever make, and the mortgage you choose can cost or save you tens of thousands of dollars over time. Even small differences in interest rates, loan terms, and fees can dramatically change what you pay each month and over the life of the loan.

In this guide, we’ll break down why comparing mortgage lenders matters, how to evaluate loan estimates side by side, and how to use those comparisons to negotiate better terms so you can feel confident you’re getting the best deal for your situation.

Why Comparing Mortgage Lenders Can Save You Thousands

For most of us, buying a home is the most expensive purchase of our lives. And, assuming you plan on using a mortgage to finance that purchase, seemingly small differences in loan terms can add up to serious money.

For example, say you need a $250,000 mortgage to purchase a home. One lender offers a 30-year mortgage at 3.5%, while another offers a 30-year mortgage at 4.0%. At only 0.5%, this difference between interest rates shouldn’t be a huge deal, right? Wrong. If you went with the 4.0% option and held it for the full loan term, you’d end up paying nearly $26,000 more in total interest.

Or, say that a single lender offers both a 15- and 30-year mortgage option, with a 3.0% rate for the former and 3.5% for the latter. With a $250,000 15-year mortgage, you’d have monthly payments of around $1,750. Alternatively, you could select the 30-year option and only pay $1,130/month – a monthly savings of $620. But, you’d also need to pay over $93,000 more in total interest with the 30-year loan.

These are just some basic examples. But the important takeaway is that seemingly small differences in mortgage terms can lead to significant differences in repayment over the life of a loan. Accordingly, savvy borrowers compare mortgage lenders and interest rates to secure the best possible loan terms.

How to Compare Mortgage Lenders and Interest Rates

This begs the question: what’s the best way to compare mortgage lenders and interest rates? While recommendations vary, we argue that borrowers should compare mortgages offered by at least three lenders. Additionally, you should request both 15- and 30-year mortgage quotes from each. Even if you plan on using a 30-year loan, seeing the numbers behind a 15-year one can inform your decision-making, especially when you see how much extra interest you need to pay over a 30-year term or even a 40-year term.

To access all of the relevant information about a particular loan product, you’ll need to look at the lender’s “loan estimate.” Formerly, lenders called this information sheet a “good faith estimate.” Regardless of the name, the document contains key information about a mortgage loan. You’ll use this information to compare different lenders.

More precisely, lenders are required by law to provide mortgage applicants with a loan estimate within three days of the application. And, as the government regulates these loan estimates, all of them will share similar information about a particular loan product. While the insurance and property tax estimates won’t differ between lenders or products, borrowers should review the information below when comparing loan estimates.

Comparing the Right Loan Types

Do you want to use a particular type of loan? For instance, veterans often choose VA loans, while other first-time home buyers frequently opt for FHA loans. Alternatively, you can pursue a conventional loan, one not backed by the government. Realistically, you should confirm this information before comparing lenders and loan estimates. That is, if you want to use a VA loan, confirm that a particular lender offers VA loans before narrowing down your list of mortgage lenders to compare.

Compare Loan Terms and Interest Rates Side by Side

Most residential mortgage lenders offer a variety of loan terms, usually from 10- to 30-year terms in 5-year increments. But different lenders will offer different interest rates for these loan options. As such, when comparing lenders, you’ll first want to confirm that they offer the loan terms you’re considering (e.g., both 20- and 30-year terms). Second, you’ll want to compare the interest rates associated with those terms.

Differences in Down Payment Requirements

Certain government-backed loans have clear down payment guidance (e.g., zero down with VA loans and 3.5% down with FHA loans). But some lenders offer unique loan products with their own down payment requirements. If one lender offers a 30-year conventional loan with 10% down while another requires 15%, that would be something to consider when comparing lenders.

Interest Rates vs. Annual Percentage Rate (APR): Which Matters More?

With the exception of loan terms, interest rates will – more than anything else – determine how much you pay A) per month, and B) in total interest over the life of the loan. As a result, comparing the rates offered on similar loan products by different lenders is a critical step when evaluating loan estimates.

But, you’ll notice that loan estimates include two percentages: the interest rate and the annual percentage rate, or APR. APR is a far better metric for comparison than the interest rate. More precisely, a loan’s APR includes the interest you pay on the loan principal plus fees and one-time loan costs (e.g., points). This means that APR more closely reflects the true cost of your borrowing, and it lets you better compare loan products. (NOTE: We’ll discuss loan fees and points in the next two sections.)

Related directly to interest rates, loan estimates include a total interest paid (TIP) section. As the name suggests, this number shows the total interest expense you’ll pay if you hold the loan for its entire term. This provides borrowers with one more way to: A) compare loan products, and B) understand the full costs associated with a mortgage.

Loan Fees and Origination Costs

Some loan products include a loan-specific fee. For example, the VA loan requires a VA funding fee unless you are a veteran receiving VA disability compensation. However, most lenders also charge an origination fee for processing and providing the loan. Indirectly, these fees are reflected in a loan’s estimated APR. But borrowers should still closely examine the fees a lender proposes. For instance, if one lender charges a $5,000 origination fee and another a $1,500 one, you can potentially save $3,500 in closing costs by going with the second lender.

How to Compare Point Options

Like loan fees, borrowers often pay points on a mortgage at closing. Points serve as an optional way to pay more upfront to lower your interest rate. A point equals 1% of the total mortgage, and lenders will offer different reduction options. For instance, a lender may offer a 0.5% interest rate reduction in exchange for a point. On a $250,000 mortgage, that means you’d pay $2,500 at closing to reduce your interest rate by 0.5%.

When comparing points between lenders, you’ll want to look at two primary factors. First, does one lender offer a larger interest rate reduction for the same number of points? If so, that’s a clear advantage to you as a borrower, lowering your interest rate for less money.

Second, what’s the breakeven period for an interest rate reduction? For example, if the above $2,500 point reduces your monthly payment by $100, you’d break even after 25 months ($2,500 in points divided by $100/month in savings. If you plan on owning your home for more than that period, paying the points makes sense. If not, you shouldn’t, as you won’t recoup your costs.

If you’re not comfortable calculating these repayment periods yourself, lenders can provide you with details on how long it will take to break even on different point options.

Private Mortgage Insurance (PMI) Costs Between Lenders

Generally speaking, if you put down less than 20% on a conventional (i.e., not government-backed) mortgage, you need to pay PMI. While amounts vary, lenders typically divide this annual premium by 12 and add it to your monthly payments.

However, some veterans may qualify for conventional mortgages that do not require PMI with down payments of 5% or less. When comparing mortgages, all else equal, borrowers could save thousands of dollars in PMI.

Estimated Monthly Payments and Total Interest

Accounting for all of the above information, lenders will include your estimated monthly payment in the loan estimate. With this, borrowers need to balance two competing factors. On one hand, you want to minimize monthly payments for the same loan terms. That is, if Lender A estimates $1,000/month on a 30-year loan and Lender B estimates $1,200/month for the same term, going with Lender A likely makes sense, as you’ll save $200/month.

But borrowers also need to balance monthly affordability with total interest costs. Generally speaking, the shorter the loan term, the less you’ll pay in total interest. But you’ll also have larger monthly payments with a shorter loan term. As a result, borrowers should closely analyze their budgets to find the sweet spot between A) monthly affordability, and B) lifetime savings on mortgage interest payments.

Check for Prepayment Penalties

Most residential mortgages do not have prepayment penalties. That is, if you refinance your mortgage or otherwise pay off a large chunk of your loan balance ahead of schedule, your lender won’t charge you. But some loans do have such a prepayment penalty, which can significantly limit your flexibility when trying to refinance a mortgage. Accordingly, your loan estimate should clearly state that there is no prepayment penalty. All else being equal, we recommend choosing the mortgage lender that does not charge one of these penalties over one that does.

Use Lender Comparisons as Negotiating Leverage

At the end of the day, lenders want your business. Recognizing this, comparing mortgage lenders can give you the leverage you need to negotiate better terms. Yes, you absolutely want to compare lenders and interest rates to get the best mortgage terms. But you can also use those comparisons to get better terms.

For instance, say you compare 30-year mortgages offered by three lenders: A, B, and C. If Lender A has the lowest interest rate, you’ll likely want to choose that option. But, say that Lender B has a lower origination fee, and Lender C offers a more generous point program at lower rates. You can take the loan estimates from the other two to Lender A and negotiate for better overall terms.

While lenders don’t have to match competitor terms in negotiations, you’re far more likely to get concessions when you approach a lender armed with other loan estimates.

Final Thoughts

Due to the significant costs associated with buying a home, you shouldn’t go into the purchase process without doing your research. Before opting for a particular loan, make sure you compare mortgage lenders and interest rates. Small upfront concessions can save you tens of thousands of dollars over the life of a loan.