Many miss significant savings when applying for a mortgage

Mortgage borrowers who know exactly what they need are more likely to shop around for lower interest rates and may achieve significant savings.

  • The Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency (FHFA) jointly funded and developed a survey examining information related to consumers’ mortgage shopping experience. The National Survey of Mortgage Borrowers (NSMB) asks consumers who have recently taken out new mortgages approximately 100 questions covering the entire mortgage process. The CFPB examined a subset of the questions asked of consumers, and published their findings in a report entitled Consumers' mortgage shopping experience. One key finding is that almost half of the consumers who take out a mortgage for home purchase do not shop around for a mortgage prior to applying for the loan. By failing to shop for a mortgage, many consumers miss potentially significant savings. The difference in interest rates, though sometimes seemingly insignificant, can account for thousands of dollars over the life of the loan. Why do a significant number of people fail to shop different lenders?

    The report also points out that mortgage interest rates have remained at historic lows during this period as well; however, mortgage rates can vary considerably across lenders. What does this mean in practical terms? A borrower with a relatively good FICO score and enough money for a 20 percent down payment on a home may be able to get an interest rate at or below 4 percent. However, this same borrower may be quoted a rate by another lender that is more than 50 basis points different, e.g. the difference of 4.0 to 4.5 percent. On a 30-year fixed-rate loan for $200,000 that could mean a difference of up to $60 per month. The report points out that this is a $3,500 difference over the first five years of the mortgage.

    The difference in potential savings is significant. To a consumer on a tight monthly spending plan, the difference could be crucial. Consumers stand to lose money that could otherwise be used to support their monthly needs. At first glance, the solution seems apparent- shop around. If you are in the market for a cell phone, and you discover two identical plans but one costs $60 per month and the other $120 per month, the answer seems rather obvious as to which plan you would choose. However, what may seem like common sense when purchasing a cell phone plan may not seem so obvious when shopping for a mortgage.

    A number of influences may affect a consumers’ behavior. The report states that a sizeable share of borrowers look to a lender or broker’s reputation, geographic proximity and other relational characteristic in determining whether to seek mortgage funding. Furthermore, the report notes that the primary source of information relied on by mortgage borrowers is their lender or broker, followed by their real estate agent. This is significant because, although the information that the consumer receives may be very accurate, these parties have a significant interest in where the consumer goes for her mortgage loan. Those consumers who did not consider the relationship, reputation and proximity of the office as well as other similar characteristics as very important were more likely to shop around than those who did consider those characteristics important. In short, many times, they pick lender or broker before the mortgage product is picked (e.g. shopping at a particular store over another store without regard to the products or prices). Those who did not consider such factors as important, shopped around.

    Seemingly low on the list of influences are housing counselors.  Housing counselors provide counseling and education to the borrower that helps make an informed consumer. Another monetary benefit directly affecting the lender is that the 90-day delinquency rates of borrowers receiving counseling are reduced by an average of 33 percent according to a HUD study. Consumers who know exactly what they need are less likely to default and shop around for lower interest rates in order to achieve significant savings.

    Buying a home is one of the most significant purchases that a person will make in their lifetime. Yet many people miss out on the potential for significant savings.

    Michigan State University Extension offers a variety of homeownership programs throughout the state of Michigan. The MSHDA and HUD websites contain lists of certified counseling agencies. In addition, there are Michigan State University Extension Finance and Homeownership educators located throughout the state of Michigan who are HUD certified and teach classes. You can visit MI Money Health to find events plus more information about taking a course in-person, by webinar with a live instructor, or self-paced online learning. You can find a certified homeownership counselor or program being offered in your area.

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