Does it Pay to Shop for a Mortgage?

October 19, 1998, January 14, 2011 Commentary, January 14, 2012 Postscript

On rereading this article in 2011, my first impulse was to scrap it, as I have done with numerous other articles that date from the period when I thought I knew a lot more about this market than I actually did. Instead, I decided that retaining it with accompanying commentary on where it went wrong, might be interesting to readers. So I have divided the article into two parts, the original penned in 1998 without change, and the commentary written in January, 2011.

About a year later, I unveiled the professor's loan origination network, which is described briefly in a postscript.

1998 Version

"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, 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%!

2011 Commentary

The fallacy in the analysis above is that it assumes that borrowers can borrow at the prices quoted to them, so that all they need to do to find a better price is to solicit more price quotes. That is the way most markets function, but it is not the way that the home loan market works. The fact is that sometimes it does NOT pay to shop, and this theme runs through many articles I have written since 1998. A rundown of the reasons it may not pay to shop is found in Major Hazards In Shopping For a Mortgage. See also Why Doesn't Competition in the Home Mortgage Market Provide the Benefits Expected From Competition?

2012 Postscript

After many years of development, my own loan origination network finally materialized.
It changes every article I wrote about mortgage shopping starting with this one in 1998. The new answer to the question of whether or not it pays to shop for a mortgage is that it does pay if you use the shopping facility on my site. See Finding a Mortgage on the Professor's Certified Lender Network.

Want to shop for a mortgage on a level playing field?

Why Shop for a Mortgage with the Professor?

  1. Receive His Help in Finding the Type of Mortgage That Best Meets Your Needs
  2. Shop Prices Posted Directly by His Certified Lenders
  3. Shop Prices Fully Adjusted to Your Deal
  4. Shop Prices That Are Always Current
  5. Get Him as Your Ombudsman Just in Case

Read More About the Support and Protections Listed Above

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