Many miss significant savings when applying for a mortgage – Part 1
What may seem like common sense when purchasing a cell phone plan may not seem so obvious when shopping for a mortgage.
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. The report points out that existing home sales have returned to pre-recession levels. Although sales of new homes have increased since their fall, they remain below their pre-recession levels.
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. Page 10 of the report summarizes some key findings. One key finding is that almost half of the consumers who take out a mortgage for home purchase fail to shop for a mortgage prior to applying for the loan. Buying a home is one of the most significant purchases that a person will make in her lifetime. Yet a large number of people miss out on the potential for significant savings.
Michigan State University Extension offers a variety of money management programs throughout the state of Michigan. For more information on making a spending plan, saving money and making money decisions, visit MIMoneyHealth.org.
Other articles in this series: