Lew Sichelman
Years ago, my oldest son (by five minutes) was in the middle of buying his first house when the state announced a program that offered below-market mortgage rates for first-timers who met certain qualifications.
When I mentioned I thought this was something worth looking into, he rejected the idea, saying he already had his financing lined up. But I insisted, arguing that he might be able to significantly cut his monthly payment – an important point for any young family buying their first house.
He ended up securing the lower-cost loan and saving $100 a month. And since he lived in the place for 10 years, he pocketed $12,000 overall.
I tell this story because, according to a new report from the CFPB, all buyers, not just rookies, can save a significant amount of money if they shop for the best deal on their mortgage.
How much can they save? Around $100 a month, said the report.
50 Basis Points Adds Up
The study found that rates differ between lenders by as much as 50 basis points. In lender parlance, it’s called “price dispersion,” and it exists for practically every type of mortgage, from government-backed loans to those in the private market.
Based on the 2021 loans it looked at, the CFPB said that a $300,000 mortgage at a fixed rate of 3 percent for a 30-year loan would cost $1,265 per month. (That’s for principal and interest alone, not taxes and insurance.) But if the rate bumped up to 3.5 percent, the payment rose to $1,347 – a difference of $82, or a 6.5 percent higher payment.
“The math remains similar” using today’s higher rates, wrote the report’s authors, Alexei Alexandrov and Elizabeth Saunders, and the results can have an even bigger effect. At today’s rates, for example, a half-percent difference on the loan described above would result in a $100 higher payment – $1,896 at 6.5 percent vs. $1,996 at 7 percent.
“In a higher interest-rate environment, with monthly payments being much higher overall, this $100 a month difference might matter even more as borrowers potentially are more stretched to make ends meet,” Alexandrov and Saunders said.
The CFPB report confirms what LendingTree and others have been saying for ages: that buyers who take the time and effort to price-hunt could cut their monthly outlays by quite a bit.
Last summer, LendingTree reported that borrowers who shopped around could save an average of $63,151 over their loans’ 30-year terms, which breaks down to about $175 a month. The reason: price dispersion. Across the 50 metro regions the company studied, the average spread between the highest and lowest rates offered to borrowers was 82 basis points, or almost a full percentage point.
Why such a wide range? Each lender has its own set of criteria concerning the risks it is willing to take. The greater the risk it assumes by lending to you, the higher the interest rate. And since one lender might find you riskier than another does, it pays to shop around.
Many People Still Don’t Shop
Unfortunately, homebuyers shop far less for a mortgage than car buyers do for their favorite makes and models. Fannie Mae, the government-sponsored enterprise that buys loan on the secondary market, said more than a third of consumers receive just one quote before picking a lender.
But Zillow said the number is much higher. In its own 2022 study, the listing portal found that almost three-quarters of prospective buyers had not shopped for a loan and had no plans to do so. By comparison, 28 percent said they spent “at least a month” researching their vehicle purchases, and 23 percent spent that long before booking a vacation.
The reasons people don’t shop around for a mortgage? Thirty percent told Zillow they feared it would hurt their credit, 24 percent were happy with the first lender they contacted, and 19 percent didn’t want to spend the extra time.
To be clear, shopping for a mortgage can potentially affect your credit, but in a limited way: “Buyers can shop and submit multiple applications over 45 days with only one hit to their credit score,” said the Zillow report.
Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.
