You’ve heard it a million times, but I’ll say it again. It pays to shop around for your mortgage.
Freddie Mac told us a while ago, and now the Consumer Financial Protection Bureau (CFPB) is echoing the same thing.
It is not a trivial amount of savings. The bureau finds that mortgage rate spreads are often 50 basis points (0.50%) of the annual interest rate.
When looking at the average loan amount of about $300,000, we’re talking about a difference of about $100 per month.
That’s $1,200 annually in additional costs (or savings) and $6,000 for the first five years of the loan term.
Subprime lenders offer the exact same products at different rates
Similar to any other business, mortgage lenders offer the same products at different rates.
Home loans aside, a lot of companies sell the exact same product. That’s why there are comparison or Google shopping sites.
You enter a product and are offered different prices, shipping costs, and so on.
Throw in a coupon code or special pricing and one company can make the deal compared to the rest.
While mortgages are a little unique, you work with a team of individuals to close your loan, the core product is generally the same, a 30-year fixed rate mortgage.
Most homebuyers and even existing homeowners who refinance opt for a 30-year fixed-rate loan.
This means that you get the same product no matter where you get it from. The difference is the service and perhaps the efficiency of the company or individual in actually financing the thing!
But assuming we’re comparing competent lenders (or mortgage brokers), you end up with exactly the same thing.
As such, you should not pay more for it. And to avoid paying more for it, you should take the time to shop around in mortgage rates and fees.
Rates can vary greatly across all types of mortgage
The CFPB conducted an analysis to determine the size of the price dispersion among home loans.
They did this by combing through HMDA data from 2021.
They found that rates vary “in almost every sector of the mortgage market”.
This includes matching loans backed by Fannie Mae and Freddie Mac, mega loans, and government-backed options, such as FHA and VA loans.
As noted, this price spread for mortgages often hovers around 50 basis points (0.50%) of the Annual Percentage Rate (APR).
For example, during 2021, the average interest rate was 3% (yes, we all miss those days!).
But not everyone gets a 3% mortgage rate. Many homeowners are weighed at 3.5% or higher.
We’re talking about a monthly payment of $1,265 for a 3% interest rate vs. $1,347, which is a difference of $82 per month.
Today, we might be talking about a rate of 6.5% vs. 7% respectively, or roughly $1,896 vs. $1,996.
Not only are you paying too much today, but doing so could make the loan unaffordable given the high prices and prices of homes.
Why do mortgage rates vary by lender?
Now as to why prices got dispersed in the first place, the CFPB points to a few different reasons.
For one, not all lenders are created equal. Some of them have retail branches, while others are only online. We’re talking about a website versus a real office space.
In terms of business practices, some keep their loans on their books and/or service the loan, while others sell them quickly and move on to the next loan.
There’s also branding – the people you’ve heard of might spend a lot of money on advertising and charge slightly higher prices as a result.
Others may keep their interest rates high to level demand for stakes, aka limit applications due to capacity. Or simply calibrate their appetite.
It is also possible that companies that do not overlay lenders charge more for the increased risk.
Finally it is simply a matter of borrowers not shopping around. The average borrower only talks to one lender and thinks the rates are the same regardless.
So rates are not necessarily dictated by traditional supply and demand variables.
My assumption is that comparing prices on a mortgage is harder than it is on a toaster.
Because of this many consumers go with the first lender they talk to and call a day.
If you don’t shop around for your mortgage, you could overpay for the next 30 years
Now this is the important thing when it comes to a home loan. If you end up with a mortgage rate that’s 50% higher than the competition, you’ll be hitting your wallet month after month.
It’s not a one-time slip like buying a TV or a hotel room. You don’t just pay one time extra and forget about it.
This higher amount stays with you for as long as you hold your mortgage. If we’re talking about a 30-year fixed home loan, that can take a while.
So the mistake of not shopping for your rate could cost you $100 per month for as long as the loan lasts.
For me, this is much worse than overpaying for a product at once.
Long story short, if you are serious about saving money, you should take the time and talk to more than one lender.
A proper search for home loans should include local banks, credit unions, mortgage brokers, and online lenders. Don’t limit yourself to just one type of company.