The rule of thumb for potential mortgage borrowers is to get three quotes. Unfortunately, few follow through and it could possibly cost them money. As a trusted advisor, you can help your client by recommending mortgage rate search engines as well as multiple lenders, but make sure that your clients are considering the total cost.
A recent study by two economists at the Consumer Financial Protection Bureau (CFPB) looked at how borrowers shop for mortgages. They analyzed the rate sheets, like a cafeteria menu, from different lenders for loans sold to Fannie Mae and Freddie Mac that were smaller than $417,000 and compared them to the actual rates and points received by borrowers who bought a home in 2014.
The authors found that there was a wide dispersion of up to 50 basis points (0.5 percent or the difference between 3.5 percent and 4.0 percent) from the best and worst rate offers after having controlled for factors like size of the borrower’s down payment and credit score. These results were used to model what would happen if a consumer did additional search (s) for rate offers. The authors found that one additional search could reduce borrower’s monthly payment by $8.63 on average. Furthermore, this effect grows with the number of searches and five additional searches could provide a reduction of $17.03 per month. In some instances, the borrower’s initial offer was very strong and additional searches did not reduce their rates.
The authors also found that:
1) The act of shopping forces lenders to compete, reducing costs by a similar amount for all borrowers regardless of whether they shop or not.
2) Simply telling borrowers that there are better offers out there (somewhere) is not enough
3) Websites that offer mortgage rates from multiple lenders may help by generating some competition, but they are not perfect as they do not offer rates from every lender in the market and thus do not create perfect competition.
4) REALTORS® and friends aid the process by referring borrowers to lenders
5) These savings are likely larger for borrowers who use FHA guaranteed financing and smaller for those taking out jumbo or portfolio loans.
This latter effect likely reflects the financial acumen of the borrower and suggests the first-time borrower would greatly benefit from getting multiple offers rather than relying on mass marketing.
It is worth noting that the authors only conducted the research for one year, 2014. These effects could change from year-to-year as originators or investors change their pricing to reflect risk or, as during the early 2000s, underprice risk. In addition, the authors do not segment the results by borrower quality. Some lenders may price riskier borrowers slightly better than other lenders and this was certainly the case for GSE financed loans prior to reform of the representation and warranties framework in 2015 and it remains the case for FHA loans today, which might explain the stronger effects observed by the authors for FHA loans. Regardless, these results are robust and suggest that searching for rates may help borrowers to save money.
However, these results only incorporate the rate and points paid. They do not include lenders’ fees or any fees for bundled services like title insurance, which some lenders may offer at a discount. Likewise, the authors do not account for the quality of the consumer’s experience. Finally, sometimes consumers do not shop around because they prefer to use mortgage companies, or other settlement service providers, affiliated with the real estate company they are working with. Consumers surveyed by NAR have noted that “one-stop shopping” can make the home-buying process more efficient and manageable.[1] Consequently, it is important to consider the entire offer and not just the rate and points.
So, tell your clients, especially first-time buyers, to shop more! It may save them money. They should use websites that quote multiple lenders and get offers multiple offers on their own from large retail lenders, smaller banks or credit unions, and mortgage banks, but always consider the total cost, which includes the lenders’ fees and other services. Your client could save money and you may get a referral or a repeat customer.
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