> Posted by Jeffrey Riecke, Communications Associate, CFI
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Obtaining a mortgage is often the single largest transaction a person will ever make. Despite this, about half of Americans actively consider only one lender or broker before taking out their mortgage. Why? A new report from the U.S. Consumer Financial Protection Bureau (CFPB) details this phenomenon and some of the factors in play, especially consumer confidence. Tuesday, at an event releasing the report, CFPB Director Richard Cordray put the reality into stark and relatable terms, positing that many individuals spend more time shopping around for a TV or other household appliance than they do looking for a good mortgage. He remarked, “When you are spending a lot of money, you are literally betting the house on the choices you are making.” At the event, Cordray launched a suite of tools from the CFPB to empower informed decision-making. The hope is that these tools will ultimately get Americans to… shop.
Cordray recommends that mortgage seekers fill out applications with multiple lenders to see which one offers the best deal. Filing multiple applications doesn’t hurt one’s credit score, contrary to popular belief; multiple credit checks from potential lenders within a certain time window (generally 14-45 days) are considered a single inquiry. The CFPB report, which is based on new data in the National Survey of Mortgage Borrowers, found that 77 percent of borrowers only apply with a single lender.
The report also found that prospective borrowers rely heavily on lenders as their main source of information about mortgages – even though lenders have a clear stake in the borrower’s decision. Seventy percent of borrowers rely on their lender “a lot” to get information about mortgages, while 20 percent rely on websites and only 2 percent rely on housing counselors. This is especially problematic when considering how much money can fluctuate with just slight mortgage term fluctuations. During his speech, Cordray offered the following numbers for thought:
- For conventional borrowers with good credit ratings and 20 percent down payments, potential interest rates can vary a half-percent or more
- An interest rate of 4.0 percent instead of 4.5 percent on a 30-year fixed-rate loan for $200,000 translates into approximately $60 in savings per month
- Over the first five years, this equates to about $3,500 in mortgage payments savings
To mitigate passivity by home buyers, the key is confidence – or we might say financial capability. The report found that customers with more confidence in their knowledge about the mortgage process were more likely to shop. Among those very familiar with available interest rates, this was especially true. They were almost twice as likely to shop for their mortgages as those unfamiliar with interest rates. Those who are intimidated are less likely to engage with the process.
The new CFPB tools aim to equip borrowers with resources to instill this confidence. Housed on the Owning a Home platform, the interactive suite includes a guide to understanding loan options, explanations of disclosure forms, a loan closing checklist, and widgets that demonstrate interest rate implications of various choices and help borrowers assess their borrowing capacity. CFPB also offers a rate-checker, which calculates the interest rates available for users by inputting their credit score, location, and information about the type of mortgage they want. The checker offers users a snapshot of rates brokers are offering to borrowers like them – and it doesn’t advertise additional services or gather personal details for marketing purposes, as is often the case with similar private services. Throughout the year additional tools will be added to Owning a Home.
During the summer, the industry will begin adopting the CFPB’s new loan estimate and closing disclosure forms, which will be received by prospective borrowers shortly after they apply for a mortgage and shortly before they close on one. The new forms were developed in consult with those who will be using the forms – consumers, lenders, mortgage brokers, and settlement agents. The forms were validated through a quantitative study, where participants provided more correct answers about a sample mortgage using the new forms than the existing forms. The CFPB Know Before You Owe website has the new forms available for download, as well as an interactive feature allowing users to click on different form sections and learn about the information pertaining to each section and how the form section was improved upon from that of the previous form.
These recent developments along with the added mortgage lender regulations put in place by the CFPB last January are encouraging for the U.S. mortgage industry, the single largest consumer financial market in the world. Perhaps they’ll be enough to affect the housing market’s recovery, which in spite of improvements to foreclosures and home values and delinquency rates, has lagged the recovery pace of other sectors over the past five years.
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