Do online lenders really offer lower mortgage rates?

Mortgage rates are as easy to shop for online these days as anything else, but there are a few drawbacks to consider.

• By Hal Bundrick NerdWallet

You shop online, you save money. Just about everybody believes that and comparison shops online. And these days, mortgage rates are easy to shop for online, too.

Comparison shopping mortgage rates

Manish Grover, a marketing consultant in the New York City area, certainly seems to believe so. He sent NerdWallet an email telling us just that.

“I’ve taken out two mortgages now from online lenders advertising on Zillow, and both times I’ve got a rate which is at least 0.50% lower than my local banks or my pri considering the rate after all costs are considered (APR).”

Grover seems to know what he’s doingparing annual percentage rates is definitely the way to go, because that’s an interest rate that considers all of the estimated fees and expenses that are built into a loan.

Denied asylum in Israel, Eritreans are welcomed by Canadian Jews

“In addition, the processing complexity is much lower as well,” Grover writes. “So my question is: What are some of the factors that help these online lenders to undercut banks? Is it because they don’t have physical infrastructure and do most business on phone and email?”

Good question. But before we determine how they do it, we’ve got to find out if online lenders really do offer the lowest rates on a day-in and day-out basis.

NerdWallet tracks the daily rates of national lenders for our Mortgage Rate Index. So we pulled three of the biggest banks from our daily survey to represent the brick-and-mortar constituency, as well as Quicken Loans, the largest online mortgage lender.

To even the field, we asked LoanDepot and Guaranteed Rate, arguably the two biggest runners-up in online home loan lending, to provide us their published rates for the same time frame. We heard back from Guaranteed Rate but not LoanDepot.

We considered all of these published rates for 30-year fixed-rate loans from June 16 through July 19, just before, during and after Britain voted to leave the European Union, sending mortgage rates falling dramatically. Here’s what we found:

Mortgage rates head-to-head

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

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

In our initial analysis of four lenders (Bank of America, Chase, Quicken and Wells Fargo), Chase was clearly the low-rate winner. Then we added in Guaranteed Rate.

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

And now the asterisk

Shopping mortgage rates online has some serious drawbacks – and it’s all part of that big asterisk. You see, each lender has its own assumptions for the published rates it quotes. And the differences can be pretty significant.

• Bank of America: $200,000 loan, 20% down payment, discount points up to 1%, 80% loan to value, single-family home in California.
• Chase: Loan amount of $215,000, 20% down, discount points vary, 60-day rate lock, “excellent” credit, “not available in all states.”