Whether you’re a first-time homebuyer or a seasoned real estate investor, comparing mortgage offers is a crucial step in buying a house. After all, you want to be sure that the loan contract you sign is a good deal, and will save you money in the long run.

What Is a Mortgage Offer?

A mortgage offer comes in the form of a loan estimate, which is a standardized three-page document that outlines the terms of the loan being offered. The loan estimate includes information on the amount of the loan, the interest rate, the monthly payment, and estimates for closing costs, taxes, and insurance.

It also will indicate other major features of the loan, including prepayment penalties and how interest rates and payments may change in the future, says Kenny Li, a chartered financial analyst and a consultant for credit and financial advice website FinanceJar in Los Angeles.

You’re under no obligation to accept a loan estimate, and it’s possible to negotiate the terms.

Borrowers should not confuse a loan estimate with pre-qualification, which is an informal offer showing how much the lender would let you borrow, based on fewer details about your income and expenses.

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Understanding loan estimates

Since 2015, lenders have been required to issue a standardized loan estimate form that details all the costs associated with a loan offer, and lets borrowers compare mortgages side by side more easily.

“The loan estimate allows you to compare multiple offers from various lenders to determine what offer and which lender is best for you,” says Jared Maxwell, vice president at Embrace Home Loans in Middletown, Rhode Island. “While lenders may quote rates online, only by applying and obtaining a loan estimate can a consumer have certainty around the loan product, rate, and (annual percentage rate) they are being offered.”

Lenders are required to provide a loan estimate within three business days of receiving an application. You have 10 business days from receiving the loan estimate to decide whether to continue with the application. The lender may close your application if you don’t respond by then, and you will need to reapply and get a new loan estimate to continue with the process.

Key sections of the loan estimate include:

  • An overview of your loan offer, which includes the repayment period, loan type, and purpose.
  • Loan terms, including the principal amount, the interest rate, and any prepayment penalty.
  • Projected payments, which breaks down all the costs included in the monthly payment, such as interest, taxes, and private mortgage insurance.
  • Costs at closing, which is the estimated amount you’ll need to close the loan.
  • Closing cost details, which itemizes all closing costs, such as the origination fee, appraisal fee, inspection fees, title insurance, taxes, and insurance premiums.
  • Additional information about the loan, such as the lender’s license number and contact information.
  • Comparisons, which highlights your loan’s cost after five years, the APR, and the total interest you would pay over the life of the loan.
  • Other considerations, such as whether an appraisal is required, and fees for late payments.
  • Confirmation of receipt, where the applicants sign and date the loan estimate.

If you agree to the terms of the loan estimate, then you’ll receive a closing disclosure that finalizes the details of the loan. The lender must provide this standardized five-page document at least three business days before closing, so you have time to review the document and compare it to your loan estimate.

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How To Compare Mortgage Offers

Ideally, you should begin shopping for mortgages early in the homebuying process. Applying for pre-qualification or preapproval will give you an idea of how much you could borrow and how much home you can afford.

Comparing loan estimates comes when you’re closer to a final deal, and will give you a more concrete idea of what the finalized and approved terms will be for your mortgage. You don’t need to have a signed purchase contract to get a loan estimate, but you’ll need one to close on your loan.

To help break down the process, here are five steps to comparing mortgage offers.

1. Compare lenders

Every lender has its own criteria for approving a loan, so it’s important to shop around. You might get a not-so-great offer from one, but find an excellent deal from another.

When you compare mortgage lenders, keep these tips and factors in mind:

  • Evaluate the costs. The interest rate, in particular, has a big effect on how much your loan costs over time. Fees, such as closing costs, also affect the overall cost of the loan — especially if you roll them into the principal.
  • Examine the whole package. Be sure you’re considering factors beyond just cost. For example, most mortgages come with a repayment period of 15 or 30 years, but you might want a shorter or longer term. You also should check if you qualify for a government-backed mortgage, such as a Federal Housing Administration loan or Veterans Affairs loan, which could offer more-favorable terms for qualified borrowers.
  • What is the lender’s reputation? Getting to know your lender is important. Does it provide quick service and an enjoyable customer experience? Or do past customers say that the lender was hard to work with?
  • Cast a wide net for lenders. Your current bank is a good place to start when looking for a lender because many offer better terms to existing customers. You also should check national banks, credit unions, and online banks. Another option is to work with a mortgage broker. Spend some time searching online for lenders and brokers that meet your criteria.

2. Compare fees and closing costs

When you take out a mortgage, there are fees involved. For example, closing costs typically come out to between 2% and 5% of the loan amount. Closing costs usually are paid upfront in cash, though some buyers roll them into the principal balance of their loan. Some lenders let you pay no closing costs in exchange for a higher interest rate.

Common closing costs include:

  • Application fees.
  • Appraisal fees.
  • Closing fees.
  • Credit reporting fees.
  • Discount points.
  • Escrow funds.
  • Home inspection fees.
  • Homeowners insurance.
  • Legal fees.
  • Loan origination fees.
  • Mortgage insurance.
  • Property taxes.
  • Rate lock fees.
  • Recording fees.
  • Title insurance.
  • Title search fees.
  • Transfer taxes.

Keep in mind that some of these fees are set in stone — taxes, for example — while others are flexible. You can try negotiating closing fees or discount points with your lender. In some cases, you may shop around for third-party services, such as the title search and title insurance. Section C of your loan estimate details which services you can shop for.

You also could try convincing the seller to pay some closing costs, though it may result in a higher sale price to compensate.

3. Compare interest rates

To find out current mortgage interest rates, you can contact banks directly or search a number of online rate aggregators. Once your mortgage applications are in, you’ll be able to compare each lender’s interest rates and long-term costs using the loan estimates.

Note that the rates you see online are generally reserved for customers with good credit. Your personal financial details and credit score will determine what rates you’re offered.

It’s also important to understand the difference between the interest rate and APR, especially when comparing loan estimates. You can find the interest rate on Page 1 of your loan estimate under “Loan Terms,” and the APR on Page 3 under “Comparisons.”

The interest rate is how much the lender will charge you each year to borrow money, expressed as a percentage of the loan amount. APR represents how much you’ll pay the lender each year in interest — plus any points, fees, or other charges. That’s why the APR is usually higher than the interest rate.

“When comparing mortgage rates and monthly payments, focus on the APR rather than the interest rate,” Li says. “This gives you a better idea of the actual amount you’ll end up paying each month and over the life of your loan.”

However, when you’re comparing fixed-rate and adjustable-rate mortgages, keep in mind that the APR on an ARM can change. That makes it more difficult to evaluate the cost of an ARM. Always do the math to understand how much interest you could end up paying over the life of the loan.

4. Compare monthly payments

Another way to evaluate loan estimates is to compare each mortgage’s projected monthly payment. The monthly payment will affect your budget and cash flow, so it’s important to choose a mortgage that doesn’t eat up too much of your income.

Even so, the lowest monthly payment isn’t necessarily the best deal. For instance, extending your loan term by several years would lower the monthly payment, but cost more in overall interest. Be sure to look at the potential long-term costs in addition to the monthly payment.

5. Pay attention to discount points

Finally, consider any discount points that are included in a mortgage offer. With points, you pay the lender more upfront in exchange for a lower interest rate.

One point costs 1% of the loan amount, and usually reduces your interest rate by about 0.25 percentage points. For example, 1 point on a $200,000 loan at a 3.5% interest rate would cost $2,000 upfront and reduce the interest rate to 3.25%.

“Paying discount points will increase your closing costs, but (can) save you money overall on your mortgage,” Li says.

To find out if points are included in your mortgage offer, check the loan estimate page where closing costs are itemized. They also will be part of the APR calculation, so you can see how they would affect your annual costs.

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Will Multiple Loan Applications Hurt Your Credit?

Shopping around for the best mortgage offer is important, but you also need to protect your credit score. Any time you apply for a loan, the lender pulls your credit report and a hard credit inquiry is added to your record. A single inquiry usually has a minimal impact on your credit score, but multiple inquiries within a short period can cause your score to drop.

The exception is when you’re rate shopping. If you submit all your applications within a 45-day window, creditors will know that you’re shopping for the best mortgage and treat them as a single inquiry.

“You should plan ahead and ensure that all of your mortgage applications are filed within a 45-day period,” Li says.

Other inquiries, such as for credit cards or personal loans, will be considered separate from your mortgage inquiries, even if they occur within those 45 days. It’s important to avoid applying for new credit while getting a mortgage because lenders could see it as a red flag.

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What To Consider When Comparing Loans

Once you have offers from several lenders, it’s time to thoroughly review them. If you’re struggling to choose, here are some ways to help narrow down your choices.

Is the rate competitive?

Two of the most important factors to consider when you compare mortgage offers are the interest rate and APR. They will dictate how much your loan truly costs over time.

To get a sense of the mortgage rates that someone with your credit score and down payment could expect to receive in your state, you can explore rates via the Consumer Financial Protection Bureau’s online tool. You also can play around with different scenarios and see how much you could save if you adjusted the terms of your loan or increased your down payment.

Why is the rate so low?

If you receive a quote for an interest rate that’s particularly low, it’s a good idea to find out why. That attractive rate might not turn out to be as good of a deal as it appears on the surface.

For example, you might need to buy discount points to receive that rate. Although purchasing discount points could help save money over the long run, it also increases your initial costs.

The type of mortgage you take out also can affect your interest rate. You could be offered a lower rate on an ARM, which can change over time. If interest rates rise significantly, you could get stuck with a higher monthly payment than you can afford.

Are the fees negotiable?

Before you reject an offer that seems overpriced, find out if the lender is open to reducing certain fees or matching a competitor’s lower rate. A lender might be more flexible with its pricing to secure your business. If you have a solid credit score and healthy financial reserves, you’re likely in a good position to negotiate.

Be careful, though: There’s a chance you’ll have to make some trade-offs to decrease certain charges. For example, a lender might be willing to reduce your closing costs in exchange for a higher interest rate. Take the time to calculate whether the benefits of paying lower costs now outweigh the toll of paying higher expenses in the long run.

Do I want to work with this lender?

Look beyond the numbers. Comparing mortgage lenders is just as important as comparing the actual offers. Before committing to working with any lender, you should verify that it has positive, third-party ratings on review websites. Few or no reviews could be a red flag, Maxwell says.

Another sign to look for is lender responsiveness. Does the lender respond quickly? How easy is it to contact them? You always should feel like you understand the loan application process and what’s coming next.

“If you don’t know what to expect or don’t know the status of your loan application, then the lender is not doing a good job,” Maxwell says.

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The Bottom Line on Comparing Mortgage Offers

Filling out mortgage applications and digging through contracts might not be the most enjoyable part of buying a house, but it’s certainly one of the most important. By taking the time to compare multiple offers, you can be more confident that you’re making a wise financial decision.