One of the most important financial money management tips given to consumers is to shop for their financial services. As a financial counselor I encourage clients to shop for their financial services, especially when it comes to something as important as a mortgage loan. In the recent report from the Consumer Financial Protection Bureau (CFPB), almost half of consumers do not shop around for a mortgage when purchasing a home. Finding a better percentage rate on a mortgage loan can save tens of thousands of dollars over time.
Shopping for financial services should be like shopping for a consumer item. For instance, let’s say a consumer was shopping for a TV. A consumer may look at a store he or she is most familiar with, or a store that is advertising a low price, or a store that he or she had purchased something in the past and had been happy with the experience. These are all great reasons to purchase at a certain location, however, a consumer might find shopping around and checking all of the potential stores would enable the consumer to compare and then purchase the TV at the store that has the best price.
Some consumers do the same when they are ready to purchase a home. The consumer will go to a large bank that everyone knows about, or a bank that is advertising a low interest rate, or their bank, or a bank they have experience with in the past. When it comes to originating a home loan (mortgage loan) there are many other factors to consider other than the lowest price or lowest interest rate. That is because the lowest price may be a little harder to figure out when determining the true cost for a loan, there are many factors and much to know. The CFPB knows that this task can be daunting and has developed a tool to make it easier for consumers to shop for a home loan and compare interest rates.
Purchasing a home, for most consumers, is the biggest purchase that will ever be made. When considering the length, most home mortgages are made for 30 years, and the interest over time small savings in percentage points can mean huge savings at the end.
Consider the example below using the CFPB’s Owning a Home Tool:
A Servicemember in Virginia wants to buy a home worth $200,000, he has a credit score of 740. Using a VA loan, the Servicemember opts to have no down payment and wants to finance for a 30 year term. The tool gives multiple interest rate options for this loan ranging from 3.25% to 3.875%. The total interest paid over the length of the loan with the lowest interest rate at 3.25% is $113,348. However, if the loan was instead at the higher interest rate 3.875% the interest over time would be $138,570. The lower percentage rate with the same loan terms and the same consumer credit score would save the Servicemember over $25,000!
Bottom line: shopping for a mortgage loan can really pay off and save you money and is worth the shopping trip.