May 15th, 2018 7:29 AM by Jackie A. Graves, President
Home buyers are leaving serious money on the
According to new research from
Freddie Mac, the average
borrower could save $1,500 just by getting one extra rate quote when applying
for their mortgage. With five quotes, they could save $3,000 or more.
But Freddie Mac’s report shows buyers just aren’t doing it. In
fact, less than half of today’s borrowers shop around for rates when getting a
mortgage or refinancing. “Worse,”
Freddie Mac reported, “many consumers do not seem to realize that the rates
offered by lending institutions vary widely.”
In fact, according to David Edmondson, senior loan officer at
Flagstar Bank in Boston, interest rates vary from one-eighth percent to a
half-percent from lender to lender. On a $300,000 loan, a half-percent
difference means more than $1,000 in savings per year.
Why Aren't People Shopping?
Most people would jump at the chance to have an extra $1,000 in
their pockets, so what’s holding today’s buyers back? Freddie Mac’s researchers
point to Nobel Prize winner Richard Thaler’s economic theory.
“His research into seemingly irrational economic behaviors finds
that in general consumers search too little, get confused while evaluating
complex alternatives and are slow to switch from past choices, even if it costs
them,” Freddie Mac reported. “These types of behavior apply to more complex
tasks such as taking out a mortgage and can lead to borrowers relying solely on
their existing banking relationship or a single referral from a real estate
agent or a friend.”
But it might be simpler than that. According to Anthony Casa,
president of Garden State Home Loans and chairman of the Association of
Independent Mortgage Experts, home buying is often just overwhelming.
“If you're a home buyer, it's a pretty overwhelming process,” Casa
said. “You have home inspections. Then you have to get the mortgage loan. The
idea of sitting there and talking to three to four different mortgage companies
to get your quotes, it can be a little bit overwhelming to go through that
Not getting started early enough can also prevent buyers from
shopping around, Edmondson said.
“The No. 1 reason for not rate shopping is that buyers wait to the
last minute,” said David Edmondson. “Buyers often don’t think about the terms
of the mortgage until they have signed a purchase agreement. Once that happens,
they are dealing with deadlines and often end up going with whomever their
Realtor recommends. While this can be quick and convenient, it could be costly
Casa agreed that timing has a lot to do with it — especially in a hot market.
“Unfortunately because of the moving parts, lack of familiarity
with the process, and also the pace that you have to get things done, many
buyers will go with that first person they get referred to,” Casa said.
“Unfortunately they're going to pay a very, very high premium over the life of
the loan for doing that.”
Why Rate Shopping Works
Mortgage rates vary greatly — from
day to day and lender to lender. According to Freddie Mac’s data, in a single
week borrowers received rates anywhere from 4.2% to 4.8%.
“If borrowers only search once, some will get lucky and get a low
rate, others will get a high rate, and many will get a rate around 4.5%,” the
On average, buyers who get one extra quote will save anywhere from
$966 to $2,086 over the life of their loan. For five quotes, buyers will save
$2,089 to $3,904. “If you shop
around, you could get as much as a full three-quarters of a percent
difference,” Casa said. “It's a game-changer.”
Rate shopping is especially important in today’s market, as home
prices continue to rise. “Shopping
around and getting the lowest rate is what's going to expand your budget and
allow you to buy more house,” Casa said.
According to Ric Edelman, whose Edelman Financial Services offers
financial and investing advice, the varied nature of the mortgage industry is
also a reason to shop around.
“Some companies, for marketing reasons, choose to emphasize
certain kinds of buyers or certain kinds of loans,” Edelman said. “For that
reason, you need to shop around, just like you would for any other product.”
Veterans United, for example, specializes in loans for military
and former military members, while other mortgage companies focus more on
first-time home buyers, rural home loans or other niche markets. Some lenders
even offer professional loans for buyers with specific jobs, like lawyers,
doctors, teachers or other types of public servants. As Edelman said, shopping
around can help borrowers find better-fit loans — as
well as rates — for their
Pro Tips For Mortgage Shopping
It’s clear that shopping around can help home buyers save. But
what does that rate shopping actually look like? What can buyers do to get the
best deal in today’s competitive market?
From scoping out fees to simply staying consistent, here’s how
industry experts recommend buyers get the best rate in today’s market:
Pay attention to fees.
“Ultimately you need to figure out the monthly payment you are
comfortable making, instead of focusing so much on just the interest rate. A
borrower could be tempted to choose one lender offering a 4.125% interest rate
over another lender offering a 4.25%, but the place with the lower interest
rate could also have the highest closing costs and title fees in the market.” — Mat
Ishbia, president and CEO of United Wholesale Mortgage
Get a full breakdown of fees and
“Origination fees are another cost that will frequently vary from
lender to lender. Lenders will have different names for these fees, such as
underwriter fee, processing fee, origination fee, etc. However, it is important
to compare total lender fees when comparing one lender with another. You can
easily review fees when you have the loan estimates. A buyer may think they are
saving a little on the interest rate, when in reality they are paying a much
higher upfront fee. Ask each lender for an official, written loan estimate of
rates and fees based on your particular situation.” — Edmondson
Consistency is key.
“You just need to make sure you're comparing apples to apples. You
need to ask what the interest rate for 30-year fixed rate is so that you know,
with each mortgage company or bank, they're quoting you for the same kind of
product.” — Edelman
“It is important to think ahead. Before meeting with a Realtor,
shop around with three to four different lenders to find out what they can
offer you.” — Edmondson
Know your scenario.
“What's your credit score? What kind of home are you buying?
What's your purchase price? How big of a loan are you looking at? Define your
scenario, and connect with three to four different loan officers from three to
four different companies and say, ‘Here's my scenario. I don't need you to do a
whole application. I don't need to have you have to pull my credit; I know this
is my situation. Based upon these parameters and what my closing date is, what
can you do for me on a 30-year fixed? What are your options?" — Casa
Lock your rate.
“Once you have a house under contract, double check with each
lender to see if any of their terms have changed. Once you have compared your
options, ask to lock into the best rate that works for you. That way you’ll
avoid the rate or fees from changing while the loan is being underwritten.” — Edmondson
Consider a broker.
“When you go to a mortgage lender, you're only dealing with that
one institution's products. When you go to a mortgage broker, they work with
dozens of lenders and they can shop the loan for you to show you the rates
available from a variety of sources and showing you the best that's available
for your situation.” — Edelman
Think hard about paying points.
“You should be wary of paying points. A point is a prepayment of
the loan interest. So, one way to get the interest rate of the loan down is to
make a big cash payment up front in the form of points. You need to recognize
that by paying points, or prepaying the interest, you need to stay in the house
long enough for that to be of value. Your lender or mortgage broker should be
able to show you how many years you need to stay in the house for paying points
to be worthwhile.” — Edelman
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