Consider Telling Your Customers to Shop Around for a Mortgage
By Adam Korengold | May 17, 2016
It’s commonplace for consumers to comparison shop for cars and hotel rooms. But when facing the largest purchase they will ever likely make – buying a home – roughly one-third of shoppers get a single mortgage quote, according to recent research by the Economic & Strategic Research (ESR) Group at Fannie Mae.
Fannie Mae analysts Qiang Cai and Sarah Shahdad analyzed data from 1,199 home buyers polled between January and March of 2014 for the company’s monthly National Housing Survey/Home Purchase Sentiment Index. They found that 34 percent of first-time homebuyers and 36 percent of repeat homebuyers obtained only one quote.
Of the two-thirds who did shop around, both first-time and repeat buyers got about three quotes each.
They also found that borrowers aged 50 and older were 16 percent less likely to obtain additional quotes than borrowers younger than 30. Further, members of minority groups – including African Americans, Latinos, and Asian-Americans – were 19 percent more likely to shop around than non-minorities.
Fifty-five percent of first-time buyers reporting they had only obtained one mortgage quote said they had done so because they were satisfied with the first quote they received. That’s compared to 46 percent of repeat buyers who said they only received one quote.
Why Shop Around?
Shopping for the right loan can help homebuyers get a mortgage with better financial terms. Otherwise, borrowers may be leaving money on the table.
Regardless of age, income, or experience, all borrowers will benefit from getting the best possible deal. This will help them sustain their mortgage – even if their income changes.
Who Influences Their Decisions?
According to the ESR research, first-time buyers are 31 percent more likely than repeat borrowers to have friends and family influence their home-buying decisions. While borrowers earning more than $100,000 annually are 37 percent less likely to be influenced by friends and family than borrowers earning less than $50,000.
A more recent study by the Consumer Financial Protection Bureau sheds more light on what motivates mortgage shopping. According to this research, 70 percent of borrowers picked their lender before deciding what kind of loan they wanted. These borrowers may have been looking for a specific lender – perhaps one in their community, or one that friends or family had worked with before.
What It Means for Lenders
Does encouraging consumers to mortgage shop hurt lenders?
Actually, no, say the researchers. It’s always a good idea to encourage homebuyers to seek multiple sources of information, determine what is important to them in a loan (like interest rate and loan amount), and ask detailed questions that may help them find a product that best meets their needs.
Shahdad notes that there are several “key components to consider when comparing multiple mortgage quotes – like the lender fees and points, as well as the mortgage interest rate and any mortgage insurance costs. Homebuyers may find it easier to compare offers if they first determine the type of mortgage product that’s best suited to their situation.”
She adds that lenders can work with homebuyers to make comparisons between loans easier. “There are a number of online tools and calculators that can help buyers compare costs associated with different mortgage quotes. Homebuyers can also ask for quotes from different lenders that hold either the rate or the lender fees and points constant across quotes, simplifying the overall comparison.”
By encouraging homebuyers to shop for a mortgage, it may seem that lenders are putting themselves at risk that borrowers will go with another lender. But by educating borrowers about rates, fees, points, and other loan attributes – and helping them make better decisions – a lender is building a relationship with a client that could potentially yield other mortgage business in the future.
After all, as Sy Syms used to say about shopping for clothing, “an educated consumer is the best customer.”
Adam Korengold is a research analyst with Fannie Mae’s marketing research and analytics team.