NEW YORK (MainStreet) — About 50% of home buyers do not bother to shop around for a mortgage when buying a home, according to a newly released report by the Consumer Financial Protection Bureau (CFPB). Indeed, Americans seem penny wise and pound foolish when it comes to finances. Consumers spend a lot of time looking for bargains for their daily purchases but spend little time for financial bargain hunting on larger matters.
American consumers sort through coupons, look for sales, and even look into which store gives them more bang for the buck. They will put enormous efforts into getting bargains for electronics, appliances, cars, and hotel rooms. But the CFPB survey of recent mortgage borrowers found that almost half do not look around for the best available mortgage rates when buying a home - the biggest purchase they will ever make.
This failure to find a good mortgage rate can cost one substantially. The CFPB observed that “consumers who consider interest rates offered by multiple lenders or brokers may see substantial differences in the rates. For example, our research showed that a borrower taking out a 30-year fixed rate conventional loan could get rates that vary by more than half a percent.”
The CFPB stated that an interest rate of 4.0% versus 4.5% could mean a difference of $60 less per month. This means over the first five years a savings of about $3,500. The lower interest rate means the house will be paid off sooner, because of the additional principal will be paid even though there are lower payments.
Consumer credit organizations are very much in favor of educating people about mortgages. They help consumers increase their financial literacy - something that is sorely needed.
“Clarifi meets with people on both ends of the mortgage process,”
Financial counseling in the mortgage process may be a benefit to consumers, according to Patty Hasson, president of Clarifi, a nonprofit consumer credit counseling organization in Philadelphia.
“We counsel existing homeowners struggling to meet their monthly mortgage payments and some who may not have fully researched and/ or understood all the components of their mortgage,” she said.
Hasson said that from the outset Clarifi teaches new homebuyers basic financial facts about mortgages terms, different types of interest rates and mortgage products. Clarifi recommends to first-time homebuyers that they to shop around with as many mortgage lenders as possible and “create a comparison chart” of available mortgages that will best fit their needs.
“We want them to have as much information as possible to make the most informed decisions,” Hasson said.
The CFPB survey was conducted of borrowers during 2013. It revealed that 70% of borrowers reported they often used one lender “a lot” as an information source. Some 30% of borrowers “relied heavily” on their real estate agent for mortgage information. The Bureau cautions that even though the aforementioned people can be helpful, they also can be biased because they have an interest in the transaction.
The report also found 20% to 41% of borrowers get a lot of their information from outside sources. Borrowers knowledgeable about finance were nearly twice as likely to search for advantageous rates as those who were not.
Even though most consumers reported to the Bureau that they are “very familiar” with the process of taking out a mortgage, a significant amount reported that factors not directly related to the mortgage’s cost - including the lender’s reputation and location - are very important in their decision-making process. Such people are much less likely to shop, the CFPB noted.
Realizing that there is a need to educate consumers, the CFPB created Owning a Home, which is an interactive, online set of resources and tools to educate consumers.
It provides a guide to mortgage options. It also furnishes a “dynamic tool that lets you input your information, like credit score and down payment, to see what interest rates people with similar financial situations have been offered.” One can make adjustments to each and learn how the rates are affected.
--Written for MainStreet.com by Michael P. Tremoglie