Does it Pay to Shop for a Mortgage?

October 19, 1998 "My wife will burn up $10 worth of gasoline and 2 hours of her time to save $15 on a purchase, but I put a higher value on my time. And now I need a $200,000 mortgage. Will I get a good return on my investment in time by shopping for a mortgage?" I have the same argument with my wife, but when I needed a mortgage some years ago I shopped! The gains from shopping have actually increased in recent years as the market has become increasingly "nichified" -- divided into thousands, perhaps millions of submarkets which are priced separately. To provide a current perspective on the potential gains from shopping, I recently shopped 9 national lenders for a 30-year fixed-rate loan of $200,000 on a single-family property for purchase in Oregon. I specified an interest rate of 7% which they all offered, and compared their total upfront fees. These came in a great variety of names ("points", "origination fee", "processing fee", etc, etc), but they all come down to the same thing -- money out of my pocket as a condition for granting the loan. The median (middle) fee was $5,034, or about 2 1/2% of the loan. But the critical point is that the lowest quote was about $1200 below the second lowest quote, $1700 below the median quote, and $3,100 below the highest quote. Unless a non-shopper was lucky enough to choose the right lender � and it would only be luck because there is nowhere to go to get this information -- shopping would have resulted in savings of from $1200 to $3100. Most borrowers would view that as a good return on the required investment of time. During periods of market uncertainty, the savings from shopping become even wider because lenders respond to it differently. Striking evidence of this occurred the week of October 12, 1998 following the unexpected sharp rate spike during the preceding week. Among the 10 national lenders on QuickenMortgage.com, the range of rates offered on 30-year fixed-rate mortgages below $227,000 in California on October 13, was 6.75% to 8.625%! Similar spreads existed on other types of mortgages and for other states. All the rate quotes are standardized for points (one), lock period (30 days), and property (single-family purchase for permanent occupancy). On a $200,000 loan held 5 years, the present value cost at 6.75% is about $15,000 less than that at 8.625%! Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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