When it comes to getting the best possible interest rate for your home mortgage, apparently big is not better. So don't overlook the little guys.
Everyone knows that getting a lower interest rate on your mortgage can save you thousands of dollars over time, but what you may not know is that the best rates are not necessarily offered by the big volume players or the bank where you currently do your checking. Instead, they can often be found at smaller banks and credit unions.
“Neglecting to include smaller community banks and credit unions could prove to be a costly admission," says Greg McBride, senior financial analyst with Bankrate.com of the loan-hunting process.
“In this market, in particular with jumbo large or jumbo confirming loans, smaller community banks and credit unions are very competitive,” says McBride.
Compared to large banks, which are more depended on the secondary market, small banks have more flexibility to offer lower rate loans because “they are not dependent on an investor in the second market to eventually buy it,” he said.
Smaller banks also have an incentive to offer better rates.
According to Darren Beck, chief marketing officer at LendingTree, smaller banks often have a harder time attracting customers than large banks as they are not as convenient, with fewer branches and ATMs.
As a result, he said, they often use loans with lower rates to bring in customers in then make up for the lost profit potential in other ways, such as the new customer’s credit card and banking business.
“The holy grail is that the consumer is looking for a mortgage but also has financial assets [that they can transfer] and may be a small business owner,” he says.
The proof is in the numbers. Based on a recent search, here's two comparisons.
Take for instance, someone with a good credit score (at least 700), who is looking for a 30-year fixed rate jumbo mortgage in the New York metro area for a $1 million loan with 20% down. According to Bankrate.com, which scans interest rates, the best annual percentage rate (APR)—which is the interest rate including mortgage insurance and certain closing costs, with points paid at closing—is 5.365 percent, and is offered by Astoria Federal Savings and Loan. The next lowest APR is 5.827 percent, and is offered by Sovereign Bank. Meanwhile, Bank of America, which also turns up in this search offers three different options, with the lowest being 6.064 percent.
Looking at another region shows a similar pattern. If a borrower were to look for that mortgage option for a house in the Chicago suburbs, the best APR of 5.878 percent available is from First Savings Bank of Hegewisch. Meanwhile, the best APR offered by Bank of America is 6.203 percent.
Keep in mind, though, when you hear about low interest rates, it is essential to compare deals on an apples-to-apples basis, as the advertised interest rate is only one part of the puzzle. There are a number of fees included in mortgage loans that could have a significant impact on your total costs including closing costs, pay down points, document preparation fees, underwriting costs and more.
“Those fees not only vary widely but higher fees can offset a lower rate so it's important to make sure you are comparing apples to apples when evaluating different lenders,” says McBride.
Amy Bohutinsky, VP with Zillow.com agrees. “Smaller banks can be motivated to undercut bigger banks because they have more flexibility to do that,” however, that is not always the case.
She and other experts agree that the real key to getting the best possible rate is to shop around—which unfortunately many people are not doing to the extent that they should.
When people find a home that they want to buy “the mortgage comes as an after thought [and] that is a critical mistake. The difference in the terms of a loan can make an enormous difference in the amount you pay on that loan,” she says.
According to a survey conducted on behalf of Zillow.com, on average Americans who have purchased or refinanced a home loan in the past years typically spent less time researching a home loan (five hours) than they spent researching the purchase of a car (eight hours) or researching major home improvements such as kitchen remodels (ten hours).
“One of the things that always gets me is that people will spend weeks or months pondering the purchase of a digital camera,” says LendingTree’s Beck, but when they go to get a mortgage they often just go with whatever bank with which they do their checking.
“You’re talking about a purchase where you are paying thousands of dollars in interest,” he says. “I would encourage everyone to have four different offers,” Beck said.
Once you have several quotes in hand, it is definitely worth speaking with someone at the banks to see if you can negotiate terms.
“Most of the time, banks and lenders are going to have some wiggle room,” Beck said, adding “if not on the rate then in closing costs and points. That’s where multiple options come into play.”