Do online lenders really offer lower mortgage rates?

You shop online, you save money. Almost everyone believes this and compares online stores. And these days, mortgage rates are also easy to buy online.

It is convenient. Immediate. We are programmed to believe it. But do online mortgage lenders consistently offer the lowest mortgage rates?

Comparison of mortgage rates

New York-area marketing consultant Manish Grover certainly seems to think so. He emailed NerdWallet to tell us that.

“I took out two mortgages from online lenders advertising on Zillow, and both times I got a rate at least 0.50% lower than my local banks or my local bank. main,” he said. “And I consider the rate after all costs taken into account (APR).”

Grover seems to know what he’s doing. Comparing annual percentage rates is definitely the way to go, as it is an interest rate that takes into account all of the estimated fees and expenses that are built into a loan.

“Furthermore, the processing complexity is also much lower,” Grover writes. “So my question is, what are some of the factors that are helping these online lenders undermine the banks? Is it because they have no physical infrastructure and do most of their business by phone and email? »

Good question. But before we figure out how they do it, we need to know if online lenders really offer the lowest overnight rates.

NerdWallet tracks daily rates from national lenders for our Mortgage Rate Index. So we removed three of the largest banks from our daily survey to represent the physical constituency, along with Quicken Loans, the largest online mortgage lender.

To even the playing field, we asked LoanDepot and Guaranteed Rate, arguably the two biggest finalists in online home lending, to provide us with their published rates for the same period. We heard from the guaranteed rate but not from LoanDepot.

We have taken into account all these published rates for 30-year fixed rate loans from June 16 to July 19, just before, during and after Great Britain voted to leave the European Union, resulting in a dramatic drop in mortgage rates. Here is what we found:

Face-to-face mortgage rates

Lenders evaluate their mortgages based on various parameters:

  • The bond market, which impacts their costs and how much they make on their money.
  • Their “inventory”: how much money they have to lend.
  • Their target profit, called margin.
  • Competitive factors.
  • A customer’s credit profile: the risk the lender assumes.

There are other layers to the process, but that’s the base.

Our mortgage rate comparison below comes with a big asterisk. Here, hang on and we’ll talk about it shortly.

In our initial analysis of four lenders (Bank of America, Chase, Quicken, and Wells Fargo), Chase was the clear winner at low rates. Then we added the guaranteed rate.

One thing we’ve noticed is that Rate Guaranteed doesn’t change its rates as much as other lenders surveyed. The guaranteed rate names a rate and sticks to it for days, sometimes weeks at a time. And for a few days, the guaranteed rate really nailed the lowest rate. The rest of the time it was pretty much neck and neck with Chase.

Meanwhile, Quicken, our other online competitor, is essentially at the top of the price pack with Wells Fargo.

Here are the average rates for the period for each lender (from lowest to highest):

Guaranteed Rate: 3.40%
Pursuit: 3.44%
Bank of America: 3.65%
Accelerate: 3.69%
Well Fargo: 3.70%

And now the asterisk

Buying mortgage rates online has some serious downsides – and it’s all part of that big asterisk. You see, each lender has their own assumptions for the published rates they quote. And the differences can be quite significant.

Consider some of the assumptions made by each lender:

  • Bank of America: $200,000 loan, 20% down payment, discount points up to 1%, 80% loan to value, single family home in California.
  • Chase: $215,000 loan amount, 20% down payment, discount points vary, rate lock for 60 days, “excellent” credit, “not available in all states”.
  • Guaranteed rate: $300,000 for one home, 25% down payment, FICO score of 740 or higher, 55-day rate lock, based on a single-family home in Illinois.
  • Quicken: loan of $200,000, loan to value of 75%, debt ratio below 30% and credit score above 740.
  • Wells Fargo: $200,000 loan, 25% down payment, loan with escrow account and 740 credit score.

It’s all in the details: The location and value of the property, your credit score, your down payment and especially the rebate points charged.

All lenders say that the rates quoted are “for informational purposes only”, “are subject to change without notice” and “the interest rate on your loan will depend” on a whole host of things.

In other words, don’t count on this rate.

How to Shop for Mortgage Rates

Online lenders do not necessarily offer the lowest mortgage rates. Sorry Manich. But to his credit, Manish shopped around and got the best rate he could find, online or otherwise. And that’s the real lesson.

It’s also important to note that by buying a fare online, you’re walking into a dimly lit department store. We’ve compared a bunch of mortgage rates, all of which depend on various factors. To really know what your rate will be, you have to submit an actual application – to several lenders. Because if there’s one thing that’s obvious, it’s that every lender prices their loans a little differently.

But let’s say you can save just 0.30% on a $300,000 home loan. The difference between a 30-year mortgage at 3.40% versus one at 3.70% saves you just over $50 a month – and over $18,000 in interest over the life of the loan . And shopping around with multiple lenders will likely save you even more.

With thousands of dollars at stake, over more than a few years, small differences can mean a lot of money.

Hal Bundrick is a writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @halmbundrick.

This article first appeared on NerdWallet.

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