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Short Version

I recently spoke with a mortgage loan officer who told me that shopping around for the least expensive home mortgage loan is essentially a waste of time, because (due to regulation) the total cost of the loan will vary very little from lender to lender. Is this true?

Longer Version

I live in the United States. I was recently doing some comparison shopping for a home mortgage loan. During this process, I spoke with several loan officers. My primary goal was to determine the differences in total costs between the various lenders. To be clear, I'm talking here about the costs associated with financing the loan - not with other costs associated with purchasing and maintaining the property. My understanding is that this cost breaks down essentially into two categories: lender fees and interest payments. Other costs, which are not associated with financing and which are not under the control of the mortgage lender, would include property taxes and title fees.

My observation has been that the lenders seem to have a pretty well-defined bottom line, e.g. they'll give you a better interest rate in exchange for a higher origination fee, but ultimately you'll pay a similar amount of money over the lifetime of the loan. By chance, one of the lenders I spoke with made a comment which explicitly backed up this view. They told me that comparison shopping was essentially a waste of time - that regulation enacted since the housing collapse has effectively fixed the cost of obtaining a home mortgage loan. In other words, the total cost of the loan won't depend on the specific mortgage lender being used, but will only depend on other factors, e.g.: the specific house being purchased, the loan amount, the down-payment, and the payment period.

I find it hard to believe that there really couldn't be significant variation between lenders in the cost of the loan, but this loan officer seemed very clear on this point. Were they correct?

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Not a lot, but enough to make it worth the effort. Each broker is different in how much they charge for services, including their own profit margin. I recently refinanced a large (but not jumbo) mortgage. I checked about 6 different brokers and online lenders. The closing costs for the loans with the same interest rate ranged from about 1% to 3% of the loan. Since cash upfront was one of my constraints, I went with the one with the lowest closing costs. It didn't change my life, but every dollar counts.

Your salesman is trying to keep you from shopping around, which means that they aren't the lowest cost out there and they know it.

One important note is to make sure you are absolutely clear on what costs are involved. Some "no closing cost" loans do that by raining the interest rate ("negative points") to make up for the upfront costs. If you use negative points, you're essentially "borrowing" the closing costs over the life of the loan.

Ironically, a month after I closed, my loan was sold to a major bank that had just given me a quote that was a quarter point higher in interest AND higher in closing costs. This is not uncommon and not bad - it just tells em that the bank was more willing to buy up wholesale loans than to offer good deals on retail loans.

  • 1-3% of the loan amount is the cost variation I witnessed working for a broker prior to the housing collapse at least (amazing what the industry was doing back then, woo), and I'm not aware of any legal changes that effected this bottom line. +1 across the board for the advice. The only added caution I'd note is that some agents offer considerably worse deals than others, such that up to 5% variation on the cost of the loan is possible if you happen to be talking to one of the worst (legal) agents. Shopping around is just one of those things everyone has to do if they want to save money. – BrianH Jan 4 at 15:42
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    I'm not aware of any regulations on the amounts that they can charge, only that all costs are disclosed. – D Stanley Jan 4 at 16:35
  • This is an incredibly flippant responses. How can you say "not a lot." This is probably your biggest purchase and you may be paying it for 30 years. Its the most important thing you will ever shop for in your life. – Mark Monforti Jan 5 at 18:38
  • @MarkMonforti Is paying $3,000 for closing costs versus $1,000 going to ruin your life? Certainly the interest rate can make a big difference in the long run, but closing costs are a one-time expense. – D Stanley Jan 7 at 15:13
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Two years ago I refinanced a condo and got quotes from two companies, both in the top 10 of largest mortgage providers in the US. One of the loan officers is a friend of mine who works for a broker, and he was able to save me thousands over the other bank. The loan officer from the other company couldn't believe the offer until I showed him the document, and he said, "Wow, that's a great offer. We can't match that. You should definitely take that deal."

Granted, the deal came from a friend of mine who perhaps was forgoing some of his commission, but this proves there is definitely either a difference or at least room to negotiate.

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I would never deal with a guy that told me not to shop around just on principle alone. Remember never deal with the giant monster mega banks they can charge as much as .5 more in mortgage. You can easily save 10k per $100,000 spent on mortgage by shopping around. Also you should see the the fees in detail.

Not shoping around for a mortgage could be the biggest financial mistake in your life

Most people only get one mortgage quote. That’s the wrong way to go about it.

You’ll want to get quotes from multiple lenders in order to make sure you’re getting the best bang for your buck. Check with a local bank, as well as a credit union, and then also get an online quote or two.

In general, credit unions typically offer the best mortgage rates, but it really depends on your situation.

Important note: Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your file. You can minimize the damage by getting all quotes within a 14-day period, so it doesn’t look you’re applying for multiple loans from multiple lenders each time. That will minimize any potential damage to your credit score.

https://clark.com/homes-real-estate/first-time-homebuyer-mortgage-mistakes-to-avoid/

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