Americans may be spending more time shopping for shoes than for a mortgage, a report from the Consumer Financial Protection Bureau suggests. Almost half of consumers seeking a loan to purchase a home do not shop lenders, the agency said Tuesday.
A consumer taking out a 30-year mortgage for $200,000 and paying an interest rate of 4.5 percent will pay about $60 per month more than someone borrowing at 4 percent, and the borrower with the cheaper loan will also build equity faster, the report said.
"Consumers put great thought into the choice of a home, but the mortgage process continues to be intimidating," said CFPB Director Richard Cordray, who is announcing a "know before you owe" information initiative designed to help consumers navigate the still-complex mortgage market. "Consumers will be able to gain greater control over the outcomes of the mortgage process and maximize the benefits of this major transaction," Cordray said in prepared remarks for delivery at the Brookings Institution.
The survey, conducted in 2014, also found that a majority of home buyers seek information on mortgage choices from sources that have a stake in their decision, like lenders and real estate brokers. Some 70 percent of the respondents said they used those sources heavily. Just 20 percent said they rely heavily on websites, despite the ready availability of mortgage-related information online. A paltry 2 percent seek a lot of information from housing counselors.
"It is not a process consumers go through very often," said Greg McBride, chief financial analyst at Bankrate.com. "There is a tendency to latch onto the first knowledgeable individual and assume that they are acting solely in your best interest."
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Cordray said the agency wants to change that "culture of how people obtain their mortgages" because consumers in the survey who said they felt more knowledgeable and empowered about mortgages were more likely to shop around and find the best terms. To that end, the agency intends to improve mortgage disclosures with a new Know Before You Owe form. Its website already includes a section called Owning a Home, which walks consumers through the home-buying process.
Housing prices have been rising, but demand for homes cooled late last year amid rising real estate prices.
"Most people want to get a mortgage from someone they know and trust, and the best way that's demonstrated is to do a good job the first time around," said Craig Strent, president of Maryland-based Apex Home Loans.
Strent, however, believes that consumers should absolutely shop for a loan, especially first-time home buyers.
Where there's a disconnect is in what you should base your be shopping upon, he said. "Rates and fees are important, but they're not the only factors that should be within your decision-making process," Strent said.
Consumers should make sure the lender has the systems in place to manage the loan for the entire time the borrower is living in the house. That way the lender can alert the borrower if a refinance might be advantageous.
Borrowers should also make sure the lender can do the full mortgage processing in house. If the lender is farming out the paperwork, that could put the closing date at risk. Changes in closing dates can be costly, especially if the rate lock needs to be extended. The lender needs to have control to ensure the closing will happen on time.
Strent also recommends looking at the lender's product offerings. (They may not do government loans, for example.) Be sure they have a full product menu. It's also best to know what kind of designations or qualifications the lender has in the industry. Ideally, the lender should be taking a holistic approach and seeing how the mortgage fits into the borrower's total financial picture. They should not just be quoting a rate, but helping with financial planning.
"The more effort you put in [as a consumer], the more you will be rewarded in terms of getting a better deal," said Bankrate's McBride.
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