For many people, a mortgage represents the single largest credit source they will ever use. With houses costing hundreds of thousands these days, applying for a mortgage can be a scary thing. Know this though: shopping around is wise. Anyone planning to purchase a home in the near future would do well to start shopping for mortgages well before they begin looking at properties.
The truth of the matter is that not all mortgages are alike. Furthermore, not all of them represent good deals. Some of them are downright bad deals that should be ignored entirely. The thing is, you will not know unless you shop around. Shopping for mortgages is a lot like shopping for car insurance.
Still not convinced? Then here are five reasons explaining why it is wise to shop for mortgages:
1. Banks Have Little Incentive
Banks, building societies, and credit unions are generally the first place people look when they start thinking about mortgages. Unfortunately, these institutions have very little incentive to look out for the customer’s best interests. Most of them do just enough to meet their fiduciary responsibilities under the law. But that does not necessarily mean much beyond establishing affordability.
Shopping by going to a mortgage broker is a better option. Reputable mortgage brokers have every incentive to ensure their customers are well taken care of. After all, it’s how they get paid.
2. There’s More to It Than Interest Rates
One of the most commonly confused aspects of mortgage lending is that of interest. First time home buyers are especially susceptible because they do not understand the difference between mortgage interest and annual percentage rate (APR). It goes without saying that there is more to choosing a mortgage than just interest rates.
Mortgage interest is the amount of interest you pay on the principle you borrow. Let us do some simple maths to illustrate. Let’s say you borrow £100 at 5% interest for 30 days. You only make one payment at the end of the term. You would pay the original £100 plus 5% (£5.00) for a total payment of £105.00.
That seems simple enough, right? Now let us talk APR. That’s what lenders advertise when they market their mortgage products. APR includes mortgage interest PLUS all of the other costs of borrowing. Those other costs include things like processing fees, application fees, deed and title transfer fees, etc. You should shop around because lenders charge wildly different rates to cover those additional costs.
3. There May Be Assistance Available
You should also shop around for mortgages because you might discover there is assistance available. In the UK, we have what is known as the Help to Buy scheme. US home buyers have access to a variety of federal, state, and local grants designed to encourage housing in targeted areas.
There are home buying assistance programs in just about every developed country in the world. Your bank might not tell you that. And even if it does, it’s still wise to shop around for a better mortgage that you can pair with a home buying assistance scheme.
4. There May Be Better Rates and Terms
Every lender has its rates and terms. That is a given. But there may be better rates and terms out there that you will never find if you don’t look around. In fact, that’s what mortgage brokers are really good at. They have access to so many mortgage deals that they can usually find one with the best possible rates and terms for a client’s circumstances.
Understand that this particular aspect is especially important to people with less than stellar credit. Poor credit will not necessarily prevent you from getting a mortgage nowadays, but it can leave you with unacceptable rates and terms. The point of shopping around is to get the best rates and terms even if your credit is not as good as it could be.
5. Prequalification Helps A Lot
If none of the other reasons for shopping around inspires you, hopefully, this last one will: getting pre-qualified for a mortgage will help a lot when it comes time to buy. Shopping around makes it easier for you to get a pre-qualification letter from a lender willing to offer you a mortgage.
Pre-qualification gives you a leg up when you are ready to make an offer. It puts you in a stronger position to offer the maximum amount your budget will allow. Most importantly, it gives sellers the confidence they need to accept your offer, knowing that you have already been approved for a mortgage.
Yes, there are some home buyers who run down to the bank and accept the first mortgage deal offered to them. They are the same people who buy most of the things they need without shopping around. Do not follow their example. A mortgage represents too big a debt to take chances with.
Shopping around for a mortgage is your best bet. It gives you access to a lot more choices, increases your chances of getting the best rates and terms, and can set you up for a pre-qualification letter that will give you the edge when you find that house you want.