How to Compare Mortgage Lenders: Key Factors and What to Look For

What to Compare: Rate, APR, Fees, and Terms

When you compare mortgage offers from different lenders, focus on the interest rate, the annual percentage rate (APR), lender fees, and the loan terms. The interest rate determines your monthly principal and interest payment, but it does not include the full cost of the loan.

The APR includes the interest rate plus lender fees, points, and certain other charges, giving you a fuller picture of the total cost. For example, a lender may offer a lower nominal interest rate but charge higher fees, resulting in a higher APR. Comparing APRs helps you see which offer is genuinely cheaper over time.

You should also evaluate loan terms, such as the length of the loan (e.g., 15-year vs. 30-year) and whether the rate is fixed or adjustable. Shorter terms generally have higher monthly payments but lower total interest costs.

Finally, compare the fees: origination charges, points, and other loan costs. The Loan Estimate form itemizes these, making it easier to compare side by side.

• Interest rate: the base cost of borrowing.
• APR: the true annual cost including fees and points.
• Lender fees: origination, processing, underwriting, and other charges.
• Loan term: affects monthly payment and total interest.
• Loan type and features: fixed vs. adjustable, conventional vs. government-backed.

Sources: U.S. Department of Housing and Urban Development, Bankrate, Experian

Types of Mortgage Lenders: Banks, Credit Unions, and Online Lenders

You can obtain a mortgage from several types of lenders, each with its own characteristics. Commercial banks and thrift institutions are for-profit financial institutions that typically offer a variety of loan options. Credit unions are not-for-profit institutions that may charge fewer fees and offer competitive loan terms. Mortgage companies specialize in home loans and may provide faster processing or specialized products. Online lenders operate over the internet and may offer convenience, but specific details about their fees and terms can vary.

A mortgage broker is different: brokers arrange the loan between you and a lender rather than lending money directly. They may have access to multiple lenders, which can help you compare offers. However, you may not deal directly with the ultimate lender.

• Commercial banks: full-service, often more fees.
• Credit unions: not-for-profit, lower fees, competitive terms.
• Mortgage companies: focused on home loans, possible faster processing.
• Online lenders: convenient, but details vary by provider.
• Mortgage brokers: middlemen who can offer multiple lender options.

Sources: Bankrate

How to Get and Compare Loan Estimates

The Consumer Financial Protection Bureau recommends getting quotes from at least three mortgage lenders. A Loan Estimate is a standardized three-page form that lenders must provide within three days of your mortgage application and credit pull. It is designed for side-by-side comparison of rates, fees, and closing costs.

To ensure accurate comparisons, provide the same information to each lender: the same loan amount, term, and loan type. The Loan Estimate includes a 'Comparisons' section that shows the APR and a 5-year cost summary, which helps you assess the long-term cost.

When comparing Loan Estimates, look at the interest rate, APR, origination charges, points, and other loan costs. Beware that lenders offering the same nominal interest rate can have different APRs due to differing fees and points.

• Get loan estimates from at least three lenders.
• Provide identical loan details to each lender for apples-to-apples quotes.
• Review the APR and 5-year cost summary on each Loan Estimate.
• Compare not just the rate, but also fees and total costs.

Sources: First Federal Bank of Kansas City, Zillow, U.S. Department of Housing and Urban Development

Negotiating with Lenders

Mortgage rates and fees are often negotiable. Lenders may be willing to lower their rate or reduce fees if you ask or show them a competing offer. The HUD booklet advises that you can shop, compare, and negotiate. By doing so, you may save money over the life of the loan.

The federal Equal Credit Opportunity Act prohibits discrimination in credit transactions based on race, color, religion, national origin, sex, marital status, age, income from public assistance, or good-faith exercise of rights under the Consumer Credit Protection Act. The Fair Housing Act also prohibits discrimination in residential real estate transactions based on race, color, religion, sex, handicap, familial status, or national origin.

• Ask lenders if they can beat or match a competitor's offer.
• Negotiate not only the interest rate but also lender fees.
• Use the Loan Estimate as a negotiation tool.
• If a lender won't negotiate, consider moving on to another.

Sources: U.S. Department of Housing and Urban Development, First Federal Bank of Kansas City

Red Flags to Avoid

Watch for 'bait-and-switch' tactics, where a lender advertises a low rate but later reveals higher rates and fees. This is a red flag that a lender may not be transparent.

Other red flags include pressure to act quickly, not providing a Loan Estimate in a timely manner, or making verbal promises that are not reflected in writing. Always get all terms in writing and ensure you understand the loan terms before signing.

• Bait-and-switch rates or fees.
• Refusal to provide a Loan Estimate.
• High-pressure sales tactics.
• Unusually low rates that seem too good to be true.

Sources: Experian

Evidence-Backed Comparison Matrix

The table below summarizes key lender types based on commonly cited qualities. This is not an exhaustive list, and actual terms vary by lender.

Sources: Bankrate