Shopping around for your mortgage

Question:

You often mention the need to shop around for a mortgage, and it seems logical, but is there any research that shows how much you can really save?

Answer:

There is, but let’s get to the research in a moment. There is a basic reason why mortgage shopping is important: It’s the biggest debt you’re likely to see during your life and any step you take to reduce that cost can significantly help your financial status. A $300,000 mortgage at 6.25% requires a monthly payment for principal and interest over 30 years of $1,847.15. If the rate is reduced to a flat 6% the monthly cost for the same loan is $1,798.65.

The difference between the two rates is $48.50 per month. However, this is not a one-time savings. Over a year it’s an extra $582 in your pocket. According to the National Association of Realtors, owners typically live in their homes for ten years as of 2022. So now that “little” .25% rate reduction means $5,820 over a decade.

If you think about these savings, you can see that they are understated. The reason? The money you save with a lower interest rate is not reduced by state or federal income taxes, Social Security, and Medicare.

Another important point about mortgage shopping is that the cost per hour is often very cheap. Put in a few hours of mortgage research and you may be able to save several thousand dollars. Okay, about that research.

In 2021 – when both home costs and mortgage rates were much lower than today – Freddie Mac looked into the savings made available by shopping around for a $250,000 mortgage. They came up with several interesting conclusions.

Freddie Mac found that “when it comes to mortgages, shopping around for a better rate could save you hundreds or thousands of dollars. Our research indicates that borrowers could save an average of $1,500 over the life of the loan by getting one additional rate quote and an average of about $3,000 for five quotes.”

The research showed that borrowers who obtained five offers would save, on average, $2,914 while the top 10 percent would save $3,904. Shopping around does not have to be a lengthy or

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By Peter G. Miller

complicated process.

“This shopping,” said Freddie Mac, “can be as simple as doing an internet search, visiting one’s local bank, and of course, making a few phone calls.” One result of the mortgage meltdown from roughly 2007 through 2010 was the requirement that lenders had to show offers on a standardized form, the Loan Estimate (LE). The form outlines the lender’s offer and, if you get the loan, allows you to compare the estimate with actual closing costs.

The Loan Estimate lists in plain language the monthly cost for the loan, many expected closing costs, estimated total costs after five years, plus other information.

You can use a Loan Estimate to compare offers among various loan sources – and to find real mortgage savings. Speak with local loan officers about LE forms, they might actually want to go over them with you.

Email your real estate questions to Mr. Miller at peter@ctwfeatures.com.