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Shopping around for the best deal on a mortgage has always been a good idea, but the stakes are even higher after the disparity in rates offered by lenders more than doubled last year, according to new research by mortgage giant Freddie Mac.
Consumer advocates have been trying to convince homebuyers for years that shopping around for a mortgage can save them thousands of dollars — often to no avail. Released Thursday, the new research by Freddie Mac makes the case in plain terms: Homebuyers can potentially save $600 to $1,200 a year by applying for a mortgage with multiple lenders.
Projected savings from obtaining multiple mortgage quotes
The projected savings that can be realized by obtaining mortgage quotes from multiple lenders more than doubled last year. Source: Freddie Mac research.
During October and November, borrowers who obtained two rate quotes stood to save as much as $600 a year on their mortgage payments by getting a loan with a lower rate, while those getting at least four rate quotes could have saved more than $1,200 a year.
Over the years, that can add up — borrowers who bothered to get multiple rate quotes during the second half of 2022 could potentially save more than $6,000 over five years, Freddie Mac noted.
Borrowers who don’t shop for rates may luck into a lender offering lower-than-average rates, Freddie Mac researchers said. But applying to multiple lenders can be especially beneficial when there is high “dispersion” in the rates offered by lenders, as has been the case in recent months.
Growing dispersion in rates offered by lenders
The average dispersion (or variability) in mortgage rates more than doubled last year, to around 50 basis points. Source: Freddie Mac research.
From 2010 through 2021, Freddie Mac found the average mortgage rate dispersion was less than 20 basis points, or two-tenths of a percentage point. Last year, average mortgage rate dispersion climbed throughout the year and averaged about 50 basis points during October and November.
Genaro Villa
“The increase in rate dispersion means that consumers with similar borrower profiles are being offered a wide range of mortgage rates,” said Freddie Mac researcher Genaro Villa, in a Feb. 16 research brief. “In the context of today’s rate environment, although mortgage rates are averaging around 6 percent, many consumers that fit the same borrower profile could have received a better deal on one day and locked in a 5.5 percent rate, and on another day locked in a rate closer to 6.5 percent.”
Freddie Mac’s data — and hypothetical savings — are based on rates offered to borrowers with FICO scores of 740 or better, and making down payments of at least 20 percent when taking out 30-year fixed-rate, conventional purchase loans between $250,000 and $350,0000.
While savings may differ for borrowers whose credit isn’t as good, or who are taking out bigger (or smaller) loans, the general principle still holds: Applying to multiple lenders increases the odds of getting a lower rate.
But eight years of data from Fannie Mae’s National Housing Survey shows about one-third of prospective homebuyers get a quote from only one lender — a number that’s hardly changed over time. A recent survey commissioned by Zillow Home Loans found that on average, consumers put more time into researching car purchases and vacations than they do mortgages.
Widely used technology, such as mortgage product and pricing engines, can make it easier for borrowers to get custom rates from multiple lenders. Credit bureaus won’t penalize borrowers who rate shop within a focused period of 30-45 days.
While many mortgage comparison sites promise to provide personalized rates, the Consumer Financial Protection Bureau (CFPB) is keeping on them to make sure they’re not steering consumers to lenders based the payments they receive, instead of basing their lender rankings on neutral criteria like the interest rates and fees they charge.
In a Feb. 13 advisory opinion, the CFPB spelled out how operators of mortgage comparison-shopping platforms may be violating the Real Estate Settlement Procedures Act (RESPA) if they engage in such steering in exchange for referral fees.
“Given the rise in mortgage interest rates, it is even more important for homebuyers to shop and compare loan offers,” CFPB Director Rohit Chopra said in announcing the new guidance. “We are working to ensure that online platforms are not manipulating their search results in order to coerce kickbacks from lenders.”
The CFPB also advises consumers to keep shopping after they’ve settled on the right lender, because they may also save by comparing costs for obtaining title insurance and settlement services.
While Fannie Mae data shows 91 percent of homebuyers are happy to go along with whatever title and settlement services providers their lender or Realtor recommend, lenders are required to provide a list of companies that provide such services.
“Lenders or real estate agents might recommend providers they have a relationship with, but those providers might not offer the best deal,” the CFPB warns. “You can often save money by shopping around for closing services.”
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