Consumers may consider dozens of homes before settling on the perfect one, but they put far less effort into finding the perfect mortgage, says a federal report.
A report released this week by the Consumer Financial Protection Bureau (CFPB) found that about half of consumers don't shop around for a mortgage when purchasing a home. As a result of the findings, the CFPB released an online interactive toolkit that helps consumers research available mortgage rates in their state.
According to data collected in the National Survey of Mortgage Borrowers, almost half of consumers who took out a mortgage to buy a home in 2013 didn't compare mortgage rates prior to filling out an application. For the half of consumers that did, less than one out of four borrowers actually submitted a loan application to more than one lender or broker.
For those that stuck to one lender, lack of knowledge about the mortgage process likely played a role. The survey found that 55 percent of consumers said they were very familiar with mortgage rates, while 30 percent were not at all familiar.
The report also found that about 70 percent of consumers relied on their lender or mortgage broker for information about mortgages, which while valuable, says the report, it is hardly unbiased.
Borrowers were also asked to prioritize the terms of the loan versus the characteristics of the lender. Consumers who prioritized loan terms were more likely to shop around than those that prioritized the characteristics of the lender. More than 40 percent of all borrowers said that having an established banking relationship with the lender is very important, lessening the likelihood of shopping.
Since knowledge is power, the CFPB rolled out Owning a Home, an interactive toolbox that provides complete information for the home-buying process from start to finish.
The toolbox includes a guide to loan options, terminology and costs, and a closing checklist.
Using the Rate Checker tool, consumers can calculate what interest rates are available in their state based on loan type, property value, loan amount, and credit score. The data is updated daily and covers about 80 percent of the mortgage market, including information from large banks, regional banks and credit unions. Since the values can be altered, consumers can calculate how much the interest rates would change if they improve their credit score or increase their down payment.
Consumers can also compare interest rates to determine how much they would spend in interest payments over the life of their loan.
For example, using the tool, we calculated interest rates for a conventional, fixed-rate, 30-year mortgage for a $200,000 home in North Carolina. Our borrower has a credit score between 720 and 749 (the average range for mortgage seekers in North Carolina) and a 10 percent down payment.
Based on current information, interest rates from 17 lenders vary from 3.625 percent to 4.25 percent. When comparing the highest and lowest interest rates, over the first five years, the highest interest rate will cost $5,531 more than the lowest. Over 30 years, a loan with the lowest interest rate will save our borrower $23,256.
More information about the toolkit can be found on the CFPB website.