Want a lower interest rate on your mortgage? Sometimes it comes down to three words you say in your very first conversation with a loan officer.

"I'm shopping"

In your first conversation with your loan officer, tell them you're shopping for a mortgage with the best rate and costs.

This changes how the loan officer will approach it.

I'll explain how a mortgage broker might approach it when you open with that phrase.

How mortgage broker pricing actually works

A mortgage broker typically doesn't charge an origination fee. Instead the lender they select will pay the origination fee.

But that doesn't mean you're not paying for that somewhere.

If the loan officer charges the lender a high origination percentage, then it will reflect in either your interest rate, or your buydown costs.

I'll give you a hypothetical example.

Let's pretend the loan officer is charging a 2.5% origination fee on a $400k loan (paid by the lender).

Let's say the loan officer comes back with these interest rates:

  • 6% = 2.5% points ($10,000 buydown charge)
  • 6.125% = 2% points ($8,000 buydown charge)
  • 6.25% = 1.625% points
  • 6.375% = 1.25% points
  • 6.5% = 1% points
  • 6.625% = 0.75% points
  • 6.75% = .5% points
  • 6.875% = .25% points
  • 7% = 0 points

In this example, the loan officer is charging the lender a 2.5% origination fee.

If the loan officer/mortgage brokerage did the mortgage for free (charged 0% in origination) this is what the rates would look like:

  • 6% = 0% points (par interest rate)
  • 6.125% = .5% lender credit
  • 6.25% = .875% lender credit
  • 6.375% = 1.25% lender credit
  • 6.5% = 1.5% lender credit
  • 6.625% = 1.75% lender credit
  • 6.75% = 2% lender credit
  • 6.875% = 2.25% lender credit
  • 7% = 2.5% lender credit

A lender credit is where the lender gives you an up front credit to help offset your closing costs. The higher interest rate you select, then typically you'll get a larger lender credit.

Why saying "I'm shopping" matters

The loan officer doesn't want to work for free. But if you tell him that you're shopping, then maybe instead of charging the lender the typical 2.5% he'll do something else to have more competitive rates.

Rather than have the lender pay the 2.5%, he can charge the buyer (you) directly. Say that amount is 1.25% as the origination fee.

Let's look at the 6.375% interest rate.

If he charges you, the buyer, directly then you get a 1.25% lender credit but you also get charged the 1.25% origination fee. A lot of people would call that the "par" rate because the credit offsets the origination fee.

So rather than have 7% be the par rate, it drops to 6.375%.

A mortgage broker can do that to try to be more competitive.

Hopefully that little chart above also demonstrates why it doesn't matter if someone says "I can match that interest rate."

Because almost anyone can match an interest rate. But they probably can't match the closing costs AND the interest rate.

One way to check how much the mortgage broker is charging the lender: on the Closing Disclosure, page 2, section A "Paid by others," look at the origination fee being paid by the lender.

If he doesn't do that

A tactic I hear lenders take is: "If you find a better offer, I'll match it."

This lets the loan officer charge his typical high rate and can pivot if he absolutely has to, and it forces you to do a little bit of work.

In my mind, it's like the loan officer is calling your bluff.

So here's what I would do:

  • Get an official loan estimate from your local credit union.
  • Send that Loan Estimate to the mortgage broker.
  • Ask the broker: Can you match this interest rate and closing costs?

Make him match the interest rate so it makes your job easier. If you have identical interest rates and products (conventional vs FHA) then it's easy to compare closing costs.

What to compare on the Loan Estimate

On an official Loan Estimate you'll want to compare page 2's sections A, B, and J.

  • Section A is full of origination fees, points, and underwriting fees.
  • Section B is full of admin/paperwork fees.
  • Section J may or may not include a lender credit to offset costs.

Look at the closing cost totals between the two, and you'll be able to see who is giving you the better deal. You can also run your own numbers with a payment and closing cost calculator before you compare offers side by side.

If you want to go with the lender who said "I'll match it," then make sure he gives you an official loan estimate that actually matches it. Compare the costs.

When I'd actually shop

I wouldn't shop around for the best mortgage until you've actually gotten a home under contract.

The reason is because lenders aren't required to get you a Loan Estimate until you've found a house.

You usually cannot lock in an interest rate until you've gone under contract on a house.

Give yourself a couple of days (if your contract gives you the time) and make a decision on your lender.

What I would do personally

I like to simplify processes. I would shop two lenders. I wouldn't make them battle each other. I'd lean toward a mortgage broker, but if the mortgage broker cannot match the credit union's rates and costs, I'd work with the credit union.

If my buyer profile is complicated (low FICO, complicated self employment income, etc) then I wouldn't bother shopping for the best rate. I'd focus on who can actually get the job done.

I'd make the decision as quick as possible so I could move on with the rest of the process. Loan shopping is not worth jeopardizing the ability to meet your contract deadlines.

Anyway, use that phrase "I'm shopping" up front so that way you don't feel awkward bringing it up later. If you set the expectation up front for the loan officer, then you won't feel like a jerk when you show him that you're getting a better loan offer later on.

If you want help figuring out your numbers before you start shopping lenders, you can grab a free planning session with me and we'll walk through it together.

Hope this was useful!

Sam

Originally shared by u/SamTMortgageBroker in r/NewbHomebuyer — view the original thread.