In a capitalist society, it’s important to understand why there needs to be competition. Now, there is some proof backing up the notion that competition can help consumers and borrowers. It may not seem like a surprise on the surface that you would save money on a mortgage by looking around for multiple quotes, but there is an illustration about just how much you can save over the course of a mortgage if you put lenders in competition.
24/7 Wall St. looks for all sorts of simple life hacks and personal finance hacks that can be proven ways to lower your bills for now or over the course of your life. Savings usually do not sound that grand when looking at them individually, but add up the combined savings on your mortgage, credit cards, car and food and entertainment, and suddenly you can be saving real money every month. That adds up to tens or hundreds of thousands of aftertax dollars over the course of a lifetime. If you can milk out a theoretical $200 in monthly savings and cost cuts in your monthly bills, that translates into a savings of $72,000 over 30 years and to a lifetime savings of $96,000 over a 40-year period.
Freddie Mac’s April Insight confirmed why consumers who are interested in getting a mortgage better shop that mortgage rate around. After comparing and contrasting 30-year fixed mortgage rates from all lenders during a typical week, the math should speak for itself.
Freddie Mac represented that borrowers could save an average of $1,500 over the life of a mortgage. That saving is just by getting one additional mortgage rate quote, but borrowers can save even more money over the course of a mortgage if they go out and seek multiple rate quotes.
The monthly report said that 80% of borrowers who obtain one additional rate quote while shopping for a mortgage will save between $966 and $2,086 over the life of their loan.
And the average expected savings actually increases to $2,914 if the borrower receives five rate quotes. Freddie Mac even went as far as saying that 80% of these borrowers who obtain five quotes will save between $2,089 and $3,904.
There are some obvious factors here for what drives the savings. One is of course the size of a mortgage. It is important to remember that the government-sponsored enterprises only offer conforming loans for single-family homes, which have a limit of a $453,100 maximum loan amount for homes not in high-cost areas. That makes it pretty obvious that the savings will be proportionately higher over the loan’s life for higher priced homes.
Freddie Mac also noted that borrowers who expect to have their mortgage for a longer term without refinancing and without selling and moving will have a higher cost savings from shopping for a better interest rate.
There is another issue to consider here and that is the business cycle. Freddie Mac showed that there exists a higher dispersion of interest rates in periods of economic stress, so borrowers can face even more savings by rate shopping if they are borrowing during harder times.
There are also some discrepancies among lenders by looking at the fees and commissions that can play a role from lender to lender. If you face an all-in $10,000 higher in fees and commissions and closing-related costs, it doesn’t take a rocket scientist to understand that savings will be seen in each and every month.
The most important thing a borrower can do when seeking a mortgage is not just to compare the interest rates, but to nail down exactly what each lender’s closing-related costs and commissions will be.