Money on the Table: Why Don't Borrowers Shop for Mortgage Rates?

Mortgage rates today are low, but for many borrowers they might actually be lower -- if they were willing to shop around. A new study by the Consumer Financial Protection Bureau found that more than 40 percent of us seriously consider only a single lender when looking for a mortgage.

That's a big mistake, and here's why: What's the normal course of action when someone wants a new TV, computer or refrigerator? They shop around and check every nook and cranny on the Internet for deals, but somehow the most obvious form of consumer protection is largely missing when it comes to mortgages.

"Our study found that many consumers are not shopping for a mortgage. Consumers put great thought into the choice of a home, but the mortgage process continues to be intimidating," said CFPB Director Richard Cordray.

Mortgage Shoppers Don

The penalty for not searching for the best rates can be substantial. Imagine that financing is available with Lender Smith at 4.0 percent fixed for $150,000 over 30 years. The monthly cost for principal and interest will be $716.12.

But what about Lender Jones? If Jones has the same loan available at 3.75 percent, the monthly cost will be $694.67, a difference of $21.45 per month. That may not sound like a big deal but the difference is $257.40 a year. Freddie Mac says the typical loan is outstanding seven years so the borrower who doesn't contact Jones is likely out more than $1,800.

As monthly mortgage costs rise, the ability to qualify goes down. For marginal borrowers that means the real cost of not shopping around might be a lot more than $1,800, it might instead be the ability to qualify for a loan.

No Need to Be Intimidated

If Cordray is right and borrowers are intimidated by the mortgage process, they are missing an important point: Without borrowers, lenders go out of business. It is borrowers who have leverage, leverage created by shopping around.

If you're a borrower and thinking about financing or refinancing, there are a number of steps you can take to promote your interests.

First, you have to know your credit standing. LendingTree makes this easy by offering free, no-hassle credit scores.

The service offered by LendingTree looks at the credit reports from the three leading credit reporting agencies (CRAs). If your credit score is lower than expected, or if the report from one credit reporting agency seems low, then it makes sense to look at the actual credit report to see if any items are out-of-date or factually incorrect. If yes, you can ask the CRA to check into the matter. Getting rid of inaccurate and outdated credit dings can raise your credit score and thus lower your interest costs.

Second, think about your personal preferences. Are you looking for a fixed-rate loan or an adjustable? Do you want a 30-year term or 15? Do you qualify for VA financing? How much down is comfortable for you? Do you want to lock-in a rate now or let the rate "float" and hope that interest rates will fall further by the time of closing?

Third, learn how the mortgage system works by reading plain-language financial news and commentary. The more you know the more likely you are to shop around -- and save. As the CFPB explains, "consumers who are confident about their knowledge of available interest rates are almost twice as likely to shop as consumers who are unfamiliar with available interest rates."

Fourth, shop around. A 2012 study by economists Susan E. Woodward and Robert E. Hall found that "for a mortgage with $100,000 principal, a borrower would save a median of $981 by adding one more broker to the mix and $1,393 by adding two."

Fifth, for the best-available mortgage rates follow the advice offered by the CFPB: "Get quotes from three or more lenders so you can see how they compare."

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