For many people, a home mortgage is the largest purchase they will make in their lives. The mortgage rates and types of loans that they choose makes a huge difference in the amount of money that homebuyers pay over the life of a loan. Yet some consumers will put in less time shopping for mortgage rates than they will spend shopping for consumer items such as clothes or power tools.
The consumer goods analogy may be a stretch, but a recent survey by the Consumer Financial Protection Bureau (CFPB) suggests that it is not much of one. Nearly half of the homebuyers in the CFPB survey reported not shopping for mortgage rates at all.
- Many Single Lender Submissions – Even though half of homebuyers shop around, only 25% go through the formal process of filling out mortgage applications. This dovetails with the finding that borrowers who prioritized the lender characteristics over the loan terms were less likely to shop for mortgages.
- Informed Consumers Shop More – Respondents who understood the mortgage process were twice as likely to shop for mortgage rates as the uninformed shopper was. This makes sense, given that less-informed shoppers are more likely to be intimidated by the process and are likely to lack the understanding of how to compare loan terms and long-term costs properly.
Other interesting findings from the CFPB report:
How can you become a more informed shopper? The tips below should serve as a good start.
- Understand the Process – The more you understand the mortgage process, the easier it will be for you to compare mortgages on an apples-to-apples basis by incorporating all loan fees, charges, and closing costs. You will also be able to run the proper calculations to compare fixed vs. variable rate loans over different timeframes. Online calculators are available to run comparisons; all you have to do is to understand how to use them properly.
Less confident homebuyers are more likely to go with an agent or bank that they trust from other dealings, or one that just “feels right.” That is a powerful factor, and you should feel comfortable with your lender, but surely, there is more than one lender that you can trust.
- Know What You Can Afford – Without a firm understanding of what you can afford, you may be tempted to buy more home than you can pay for and entertain riskier mortgage options. It is best to stick with a higher down payment in order to get a favorable interest rate.
- Look for Impartial Sources – Would you buy a car based only on advice from a car salesman? Probably not – you would look for an impartial opinion, and home shopping should be no different. However, the survey showed that 70% of buyers relied mostly on lenders and brokers that have vested interests in selling you a home.
The CFPB website can serve as a great sanity check. CFPB is introducing the “Owning a Home” interactive online toolkit for homebuyers designed to help consumers’ confidence and enable them to be better mortgage shoppers. Other industry websites may be helpful but be sure to check the affiliations on the “About us” pages to gauge the impartiality.
By shopping around, homebuyers can save money in both the short and long term and build up equity in their home more rapidly. Surely it is a better return on investment for you to spend more time home mortgage shopping than Home Depot shopping – unless you plan to build your own home.