Buying a new TV? Chances are you’re going to scour customer reviews, compare prices across multiple sites and tack on whatever discounts you can find.
Buying a new house? It’s much more likely that you’ll go with the first offer you find.
Almost half of consumers don’t shop around, or only seriously consider one lender, before they apply for a mortgage, according to a report released by the Consumer Financial Protection Bureau this week.
That laziness is costly — about the same as turning down a check worth thousands of dollars. Borrowers with good credit scores can see interest rates for a mortgage vary by more than 0.5 percentage points. On a 30-year-fixed-rate loan worth $200,000, someone with a 4.5 percent rate would pay $60 more a month, or $3,500 over five years, than someone with a 4 percent rate.
Even a difference of 0.25 percentage points on a similar loan could add up to an additional $10,000 in interest charges over 30 years, estimates Keith Gumbinger, vice president of HSH.com, a mortgage information Web site. “That’s $10,000 more toward your retirement,” Gumbinger says. “That fills the gas tank a lot over the years too.”
Shopping for a mortgage has become even more important given the recent volatility in rates. Since averaging 4.02 percent Nov. 6, the average rate on a 30-year-fixed rate loan has now plummeted to 3.66 percent. That has sparked a surge in people seeking to refinance or buy homes.
It feels a little counter-intuitive that people don’t take more precaution with the kind of purchase they might only make once or twice in their lifetimes. But the main reason people gave for not shopping around isn’t too far from the reasons people give for procrastinating with any decisions having to do with money — they’d rather have someone else take care of it.
The majority of home buyers — 70 percent — said they rely on their lender or mortgage broker for tracking down information about mortgages. It can be tempting to have someone hold your hand throughout the process, but that person may not have your best interests in mind. Lenders and mortgage brokers also have a stake in the sale, the CFPB points out.
“There’s a tendency to latch onto somebody who they see as an ally, even if that party has some underlying conflicts of interest,” says Greg McBride, senior financial analyst for Bankrate.com.
Shopping around before you sign on the dotted line doesn’t have to take a lot of work, McBride says.
Know where you stand. Before you apply for a loan, you should know your credit score, the three digit number lenders will look at as a measure of your creditworthiness. Consumers have typically paid a small fee to get their FICO score, but more credit card companies and banks are beginning to offer FICO scores to consumers for free.
Ask around. Use your credit score, the size of the loan and the amount of your down payment to get quotes from five or six financial institutions in your market, Gumbinger says. Your real estate agent might recommend a lender he or she has a relationship, but you should also check with other banks, credit unions and mortgage brokers in the area, he says. Don’t forget to check with your own bank and with small banks, which may offer more competitive rates, McBride says.
Online tools can help you compare. Bankrate.com has a rate comparison tool and HSH.com has a mortgage calculator. The CFPB also released a new tool to help people compare interest rates in their area.
Apply more than once. Once you have a list of three lenders offering favorable rates, some buyers should fill out applications with all three on the same day, McBride says. It’s important to apply on the same day because rates change daily, he says. Plus, if one lender doesn’t come through,”you’re not starting over from scratch,” he says. “You’ve got two other waiting in the wings.”
Compare and negotiate. Print your offers out and lay them out side by side, McBride says. Start by checking for which loan will charge the lowest interest rate. Then eliminate offers by comparing how much they charge in closing costs, appraisal fees and other mortgage fees. Negotiate with lenders to see if they”ll drop fees they charge that the other lenders didn’t, McBride says.
Ask how long it might take to close a loan like the one you’re seeking since timing issues and delays can sometimes cause you to lose the sale, Gumbinger says. “The responsibility for getting the best deal falls squarely on you,” he says.