Homebuyers can save a significant amount on their mortgage payments by doing this

Years ago, my oldest son (by five minutes) was in the middle of buying his first house when the state announced a program that offered below-market mortgage rates for first-timers who met certain qualifications.

When I mentioned I thought this was something worth looking into, he rejected the idea, saying he already had his financing lined up. But I insisted, arguing that he might be able to significantly cut his monthly payment — an important point for any young family buying their first house.

He ended up securing the lower-cost loan and saving $100 a month. And since he lived in the place 10 years, he pocketed $12,000 overall.

I tell this story because, according to a new report from the Consumer Financial Protection Bureau, all buyers, not just rookies, can save a significant amount of money if they shop for the best deal on their mortgage.

How much can they save? Around $100 a month, says the report.

The study found that rates differ between lenders by as much as 50 basis points. (A basis point is 1/100th of 1%. So 50 basis points equals 0.5%). In lender parlance, it’s called “price dispersion,” and it exists for practically every type of mortgage, from government-backed loans to those in the private market.

Based on the 2021 loans it looked at, the CFPB said that a $300,000 mortgage at a fixed rate of 3% for a 30-year loan would cost $1,265 per month. (That’s for principal and interest alone, not taxes and insurance.) But if the rate bumped up to 3.5%, the payment rose to $1,347 -- a difference of $82, or a 6.5% higher payment.

“The math remains similar” using today’s higher rates, say the report’s authors, Alexei Alexandrov and Elizabeth Saunders, and the results can have an even bigger effect. At today’s rates, for example, a half-percent difference on the loan described above would result in a $100 higher payment — $1,896 at 6.5% vs. $1,996 at 7%.

“In a higher interest-rate environment, with monthly payments being much higher overall, this $100 a month difference might matter even more as borrowers potentially are more stretched to make ends meet,” Alexandrov and Saunders wrote.

The CFPB report confirms what LendingTree and others have been saying for ages: that buyers who take the time and effort to price-hunt could cut their monthly outlays by quite a bit.

Last summer, LendingTree reported that borrowers who shopped around could save an average of $63,151 over their loans’ 30-year terms, which breaks down to about $175 a month. The reason: price dispersion. Across the 50 metro regions the company studied, the average spread between the highest and lowest rates offered to borrowers was 82 basis points, or almost a full percentage point.

Why such a wide range? Each lender has its own set of criteria concerning the risks it is willing to take. The greater the risk it assumes by lending to you, the higher the interest rate. And since one lender might find you riskier than another does, it pays to shop around.

Unfortunately, homebuyers shop far less for a mortgage than car buyers do for their favorite makes and models. Fannie Mae, the government-sponsored enterprise that buys loan on the secondary market, says more than a third of consumers receive just one quote before picking a lender.

But Zillow says the number is much higher. In its own 2022 study, the listing portal found that almost three-quarters of prospective buyers had not shopped for a loan and had no plans to do so. By comparison, 28% said they spent “at least a month” researching their vehicle purchases, and 23% spent that long before booking a vacation.

The reasons people don’t shop around for a mortgage? Thirty percent told Zillow they feared it would hurt their credit, 24% were happy with the first lender they contacted, and 19% didn’t want to spend the extra time.

To be clear, shopping for a mortgage can potentially affect your credit, but in a limited way: “Buyers can shop and submit multiple applications over 45 days with only one hit to their credit score,” says the Zillow report.

When you do decide to compare mortgages, don’t pay any attention to the interest rates you see in national headlines. All lenders calculate their rates based on local conditions, and rates often change daily. Contact at least three lenders, asking each for a written quote. Make sure they are all talking about the same kind of mortgage — a 30-year fixed-rate loan, for example, or perhaps a government-backed loan with a low down payment.

Remember to compare more than just interest rates: Take a hard look at the fees each lender charges. These will impact the overall cost of your financing and will be calculated as part of the annual percentage rate you will be quoted. The APR is itself another good comparison tool.

Make sure the estimates reflect the loan you discussed and that the rate you are being quoted is guaranteed, or locked in — and for how long. If it’s not locked in, it can change at any time before you reach the closing table. If it is, ask exactly how long you have until it expires.

Also, look for any mention of a prepayment penalty, which is a fee for paying off the loan early. If your loan has such a clause, you’ll owe the lender more than the balance of your loan when you pay it off, whether by selling the house or refinancing the loan.

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.