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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 back, and now the Consumer Financial Protection Bureau (CFPB) has echoed the same.
And it’s not a trivial amount of savings. The bureau found that the price spread for mortgages is often 50 basis points (.50%) of the APR.
Given the average loan amount of about $300,000, we’re talking about a difference of about $100 per month.
That’s $1,200 in additional cost (or savings) annually and $6,000 during the first five years of the loan term.
Mortgage lenders offering similar products at different prices
Like any other business, mortgage lenders offer the same product for different prices.
Apart from home loans, there are many companies selling the exact same product. So there are comparison websites or Google Shopping.
You enter a product and you are presented with various prices, shipping costs, etc.
Throw in a coupon code or pricing special and a company may be offering quite a bargain relative to the rest.
While the mortgages are a bit more unique, as you are working with a team of individuals to close your loan, the underlying product is generally the same, a 30-year fixed mortgage.
Most home buyers and even existing homeowners who refinance choose a 30-year fixed-rate loan.
This means you are getting the same product no matter where you get it from. The difference is the service and probably the ability of the company or individual to actually fund the thing!
But assuming we’re comparing two competent lenders (or mortgage brokers), you wind up with exactly the same thing.
In such a situation, you should not pay more for it. And to avoid paying more for it, you should time buying mortgage rates and fees.
Pricing can vary greatly across mortgage types
CFPB conducted a Analysis To determine the magnitude of price spread among home loans.
They did this by combing through Home Mortgage Disclosure Act (HMDA) data from 2021.
And they found that prices “vary across nearly every segment of the mortgage market.”
This includes conforming loans backed by Fannie Mae and Freddie Mac, jumbo loans, and government-backed options, such as FHA loans and VA loans.
As mentioned, this price spread for mortgages is often around 50 basis points (0.50%) of the annual percentage rate (APR).
For example, the average interest rate during 2021 was 3% (yes, we all remember those days!).
But not everyone got the 3% mortgage rate. Many landlords became unhappy with rates of 3.5% or more.
We’re talking monthly payments of $1,265 for a 3% interest rate versus $1,347, which is a difference of $82 per month.
Today, we can talk about a 6.5% rate versus a 7% rate, or roughly $1,896 versus $1,996, respectively.
Not only are you paying more today, but doing so could make the loan unaffordable given the higher rates and home prices.
Why do mortgage rates vary by lender?
Now on to why there is a price spread in the first place, the CFPB gives a number of different reasons.
For one, not all lenders are created equal. Some have retail branches, while others exist only online. We’re talking about a website versus a physical office space.
In terms of business practices, some retain their loans on their books and/or service the debt, while others quickly sell them and move on to the next loan.
There’s also branding – the ones you’ve heard of can spend a lot of money on advertising and charge slightly higher rates as a result.
Others may keep their interest rates high enough to ration demand, aka limiting applications due to capacity. Or simply to test their appetite.
It is also possible that companies that do not impose lender overlays charge more for the increased risk.
In the end, it’s just a matter of not shopping borrowers. The typical borrower only talks to one lender and assumes the prices are the same.
So rates are not necessarily determined by traditional supply and demand variables.
My impression is that it is more difficult to compare prices on a mortgage than on a toaster.
For this reason, many consumers simply go to the first lender they speak with and call it a day.
If You Don’t Buy Out Your Mortgage, You Could Pay More for the Next 30 Years
Now this is the kicker when it comes to home loans. If you end up with a mortgage rate. Up to 50% more than the competition, it’ll hit your wallet month after month.
This isn’t a one-off wrong move like buying a TV or hotel room. You don’t just pay extra once and forget about it.
That high payment stays with you for as long as you keep your mortgage. If we are talking about a 30 year fixed home loan, then it may take some time.
So the mistake of not shopping at your rate could cost you $100 each month for as long as you have the loan.
To me, this is much worse than overpaying for a product once.
Long story short, if you’re serious about saving money, you’re going to have to put in some time and talk to more than just one lender.
A proper home loan search should include local banks, credit unions, mortgage brokers and online lenders. Don’t limit yourself to just one type of company.
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