Most Buyers Overpay for Their Mortgage, New Research Shows
According to exclusive new research from Rankrate, there’s a very good chance that you’re overpaying for your mortgage by more than $3,300 per year. And, here’s the kicker: Bankrate said it’s completely avoidable.
Bankrate’s research found 9 in 10 homebuyers didn’t get the lowest mortgage rate available to them and, as a result, are overpaying for their home loans.
Bankrate noted that it’s happening nationwide, from small towns to major metropolitan areas and that this hidden homeownership tax costs the typical U.S. borrower $78,186 in extra interest and fees over a 30-year loan.
While housing research consistently shows that comparing offers from multiple lenders is the single most effective way to secure a lower rate, many buyers never do it.
“People don’t seem to understand that there is even an opportunity to shop [around for mortgage rates],” said Alexei Alexandrov, a mortgage industry researcher and former Chief Economist of the Federal Housing Finance Agency. “When you ask them just a simple yes or no question, ‘Do you think that every mortgage lender will offer you exactly the same rate?’ Most people say yes.”
It’s About Where You Live
Bankrate noted that the severity of a borrower’s mortgage overpayment depends heavily on where they live. From California to Texas, Bankrate said borrowers across nearly a dozen Western and Southern metros lock in mortgage rates well above what they actually qualify for.
Borrowers in other regions might see smaller rate markups, but they aren’t immune. The hidden homeownership tax still exists in every corner of the country, Bankrate said.
Hiding in plain sight, this tax costs homebuyers a collective $65 billion a year, Bankrate noted.
The hidden homeownership tax comes from a single, expensive misconception: that all home loans are the same and rates are identical across lenders, Bankrate said.
Combine that notion with opaque industry practices and a weaker regulatory landscape, and the most borrowers unknowingly pay more than they need to for their mortgages.
“Almost half of borrowers don’t shop around for a mortgage. They only get one quote and sit with that,” said Katie Visalli, Research Analyst in the Housing Finance Policy Center at the Urban Institute. “There’s so much of this process that’s obscure.”
Borrowers Have Leverage
Lenders are competing for your loan and that gives borrowers more leverage than they realize, and not using it could mean paying an unnecessary premium for your mortgage every month, and the long-term cost of just a slightly higher rate are significant.
“Not many people realize just how much money there is to be saved and just how much of a difference even 25 basis points [0.25%] on your rate could save you over the course of the mortgage,” Alexandrov said.
On a typical $400,000 home loan, shaving just 25 basis points off a 6.5% interest rate decreases the monthly payment by roughly $66, Bankrate said. Over the life of a 30-year mortgage, that can save the borrower+ more than $23,800 in interest alone.
Bankrate said it’s actually worse than that.
Across hundreds of metros, Bankrate’s analysis found that borrowers miss their market’s most competitive rates by more than 0.8 percentage points on average. Their data shows a clear concentration in the West, South and Midwest, and that may be because borrowers in those regions are facing less competitive local pricing, are shopping less frequently, or a combination of both, according to Bankrate’s research.
To compare metros fairly, Bankrate said it used the average rate spread – the gap between the market’s best available rate and the rate borrowers signed up for. That gap reveals that while a big market like Los Angeles racks up the largest overpayments on average, borrowers in a smaller city such as Victoria, Texas, are actually getting much worse rates on their home loans on average, Bankrate noted. The market’s best available rates are defined as the top 1% lowest-cost offers on Bankrate’s mortgage marketplace, Bankrate said.
That extra interest adds up meaningfully in metros nationwide, particularly in pricey coastal metros.
Diverse Mortgage Market
Borrowers in Los Angeles and Santa Cruz overpay for their mortgages by an average of more than $44,000 over eight years, significantly higher than the national average ($26,744). Bankrate said that for those who stay put for the full 30-year life of the loan, lifetime overpayments can top $100,000 in the country’s most expensive metros.
Why are U.S. homebuyers overpaying for their mortgages?
According to Bankrate, a lot of borrowers don’t realize is how diverse the mortgage market is. From commercial banks to independent brokers, every lender operates under a different business model and cost structure, according to Andy Warden, head of mortgage and housing market research at ICE Mortgage Technology.
Bankrate said that’s why getting multiple quotes gives you the most leverage to find the lowest-priced mortgage.
“It can produce meaningfully different rate offerings for the exact same borrower profile, so where you start your search can have a real impact on where you end up,” Warden said.
Here’s the problem.
Many borrowers pick their lender based on a recommendation from their real estate agent, friends or family. And for good reason, Bankrate noted: it’s easy to feel overwhelmed by the number of lenders on the market, and the convenience of a friendly connection feels reassuring and worthwhile.
Recent research by Dayin Zhang, a real estate professor at the University of Wisconsin-Madison who studies realtor referral networks, finds the majority of real estate agents direct nearly half of their clients to fewer than four loan officers.
Searching for Lenders
Zhang also found that this trend intensifies in cities with more lending options, which could explain why we see higher mortgage overpayments in certain parts of the country compared to others, Bankrate noted.
“No one is searching for all the lenders in the market,” Zhang said. “That is a complex and lengthy process. The real process is they ask their agent, ‘Can you give me a few names that I can go to to find a good deal for my mortgage?’”
Even when borrowers do try to compare, they often don’t know what fees to look out for or have a reliable benchmark to measure their offers against.
The mortgage industry lacks transparent pricing that allows borrowers to easily compare offers, Alexandrov said. Alexandrov said he agrees with the fix proposed in Bankrate’s research report: requiring lenders to add a line to loan estimates that shows an average annual percentage rate (APR) for borrowers with similar financial profiles.
“Mortgage disclosures show us step by step what this lender offers,” Alexandrov said. “What they don’t tell you is whether it’s a good deal or not.”
