How much time should you spend shopping for a mortgage? How much effort do you need to put in to be sure of getting the best deal?

A recent report by the mortgage data company Zillow made minor waves when it found that one-third of borrowers spent only two hours or less researching their mortgage. That's the same amount of time the average consumer spends shopping for a TV.

On average, borrowers spent five hours researching mortgages. That sounds a lot better, until you consider it's the same amount of time the average person spends making plans for their vacation. And its half as long as the 10 hours spent shopping for a car.

Home and mortgage go together

By comparison, those same borrowers spend an average of 40 hours shopping for the house they end up buying and financing with that mortgage. That's not to say you need to spend that long researching your mortgage, but most people will have the loan as long as they have the house - or nearly so. And a 30-year mortgage last a lot longer than the typical car or TV.

Of homeowners who obtained mortgages in the past five years to either purchase or refinance a home, two-thirds said they'd like to do things differently the next time they take out a mortgage, according to the Zillow study. And doing things differently can mean big savings. A difference of a quarter of a percent on the mortgage rate for $250,000 mortgage can mean a savings of nearly $40 a month on a 30-year fixed-rate loan - and nearly $14,000 over the life of the loan.

So how much time should you spend? If you've never shopped for a mortgage before, 10 hours is a pretty good rule of thumb. If you're already familiar with the mortgage process and the fees that are involved, your time can be significantly less. But the important thing isn't the time spent, but what you do with it that counts.

Check your credit reports first

The first thing you want to do, before you contact any lenders or even start shopping for a house, is to check your credit report. By law, you're entitled to a free report every year from each of the three credit reporting companies - Experion, Equifax and Transunion - so just go ahead and order all three, unless you're already ordering annual copies. Order them at www.annualcreditreport.com- that's the official source.

Once you have your reports, check them for errors. If you find any, report them to the company in question and have them corrected. You don't want bad information weighing down your credit score, because your score determines the interest rate you can get.

Next, start researching lenders and brokers. Choose about six to ten and call them up and ask about their rates and fees. With online brokers, you can do this electronically. Don't focus just on the ones that advertise the lowest rates - check with a few that appear a bit higher and try to find out the reason for the difference.

Understanding mortgage fees

What you'll find is that there are big differences in how lenders and brokers structure their fees - and understanding this is going to take most of your research time. One lender may offer a lower rate, but may charge more in points and fees, which could actually make that loan more costly than one with a higher interest rate.

When you've identified three or four that seem to offer the best deals, put in a loan application with each. Submitting a loan application means they must provide you with a Good Faith Estimate, which is a three-page federal form that sets forth the terms of the loan they're offering, including interest rate and fees. Avoid lenders who insist you pay an application fee up front - there are plenty of lenders who will offer a GFE at no charge.

The new GFE, which came into use on Jan.1, 2010, is designed to make it easy to compare offers from different lender. The GFE breaks down your mortgage costs into three main categories - the interest rate, the lender's origination fees and third-party fees charged by parties other than the lender. The form is designed to enable you to accurately compare these costs among multiple lenders and see which is the best deal.

Before committing to a lender, you may want to do one final check and request current interest rates from all of them - rates can change several times a day - before choosing one and locking in your rate. Locking in your rate pretty much commits you to a lender and you will have to pay for that. But if you've invested the time and done your research, you shouldn't have anything more to worry about.

Published on January 20, 2009