By: Laura Walton AFC®
You might drive across town to save 30% on your favorite running shoes but according to the recent National Survey of Mortgage Borrowers nearly 50% of us won’t pick up the phone to shop for mortgage rates! You’ll pay an extra $58.53 a month for a 4.5%, 30-year loan of $200,000 compared to a 4% rate. That’s $3511 over 5 years – hence the “$3500 phone call”. Over 30 years, that’s a $21,070 phone call! Take that one step further and invest that savings at an average rate of return, let’s say 6%, over 30 years. The $21,070 becomes $55,527!
The National Survey of Mortgage Borrowers examined how consumers shop for mortgages. They also found that 77% of borrowers applied to only one lender and that consumers who reported being unfamiliar with some aspect of the mortgage process were even less likely to shop.
Purchasing a home is, for most of us, the single biggest expense in our lives. Why are we careful shoppers for day to day purchases but not for our mortgage? There is a technical name for this surprising behavior – the Weber-Fechner law of psychophysics. It says that saving $30 on a $100 purchase seems more important than saving ½ of one percent on your mortgage rate. Combined with not fully appreciating the value of compounding (the $58.53 invested at 6% over 30 years), consumers routinely give up thousands of dollars in potential savings.
Richard Cordray, the head of the Consumer Financial Protection Bureau, was recently interviewed by NPR on this topic. His agency reports that mortgage rates frequently vary by 50+ basis points for a conventional mortgage for borrowers with a 760 FICO score and a 20% down payment. In order to encourage consumers to shop rates, the CFPB has launched Owning a Home, an online tool to help borrowers find and compare rates. I tried it out and found local interest rates ranged from 3.5-4.125%.
If you believe the survey results, nearly 50% of us are “penny wise and pound foolish” when it comes to shopping for a mortgage. Seems like an easy thing to change – just pick up the phone!