When comparing mortgage rates between lenders make sure you’re comparing apples to apples. Although most borrowers treat mortgages like a commodity they offer different features and benefits depending on the lender. In fact some lenders will offer different mortgage rates based on the features they offer. This revelation makes it difficult to compare mortgage rates without doing a bit of homework.
The most common reason for a significant difference between two mortgage rates is the rate hold period. When you compare mortgage rates and find a difference of 0.2% to 0.3% chances are the lower mortgage rate is only valid for 30 days. If you are purchasing a home that’s not closing for a couple of months then the quick close restriction makes this mortgage a bad choice. It’s worth getting a slightly higher mortgage rate to have the peace of mind knowing you are protected against possible mortgage rate increases.
When you compare mortgage rates be cautious of the lower mortgage rate if the rate hold periods are similar. Another common reason for a lower mortgage rate is what’s called a “sale only clause” restriction. Mortgages with this restriction will prohibit you from paying it off even if you were willing to pay full penalties. The only exception allowed is if you sell your house to a non-related third party. More than half of borrowers will need to refinance their mortgage sometime in the first 5 years. With this restriction you will not be able to negotiate your new mortgage rate and will be at the mercy of the lender.
The bottom line is that when you compare mortgage rates you need to make sure you take the other features and benefits into account. What you really want to do is pay less interest over the life of your mortgage and that doesn’t necessarily mean taking the mortgage that advertises the lowest mortgage rate up front.