Analyze This: What’s the Value of Comparing Mortgage Lenders On A Per Hour Basis?
As an educator, it is easy to tell students that before they buy any financial product (or any product for that matter), they should comparison shop. Far better, in my mind, to have students discover on their own the dollar and cents impact of spending a little extra time comparing alternatives, which is why I love this new “Check Interest Rates for your Situation” tool from the CFPB.
The tool allows consumers to see the range of interest rates on home mortgage loans available based on their situation (state of residence, credit score, size of loan, amount of down payment, loan type. Note that the data points change daily, so the example I provide today (2/23/15) will likely have different values if you replicate it in the future.
First, use this data to create a scenario using the CFPB tool:
- Credit score range: 680-699
- State: California
- House price: $200,000 (find median home values by state here)
- Down payment: 20%
- Rate type: Fixed
- Loan term: 30 years
- Loan type: Conventional
The results indicate the median interest rate for this profile would be 4.313% with the following distribution:
- 4.125%: 2 lenders offering this rate
- 4.25%: 6 lenders
- 4.375%: 6 lenders
- 4.75%: 2 lenders
So, if I was the typical consumer who didn’t shop around for a mortgage loan (almost half do not), and had the misfortune of choosing the high cost lender (4.75%) instead of the low-cost lender (4.125%), how much more would I pay in interest over the life of the loan (30 years)?
Answer: $21,311 per the tool (interest on high rate loan of $140,469 vs. interest on low rate loan of $119,158).
So, assuming you decide to spend about 5 extra hours comparing lenders to find this low interest rate low, your hourly rate works out to a little over $4,000. Do you think it is worth the effort?
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.