Almost half of consumers don't shop around for a mortgage when buying a home by checking who advertises the lowest mortgage rates, and they're only considering a single lender or mortgage broker before choosing where to apply for a home loan, according to the Consumer Financial Protection Bureau.
The CFPB also found that fewer than one out of four borrowers end up submitting a loan application to more than one lender or broker, forgoing the chance to fill out applications to multiple lenders to see which can offer the best deal.
As is the case with other purchases, an informed consumer is most likely to shop around for the best deal. Consumers who are confident about their knowledge of available interest rates are almost twice as likely to shop as people who are unfamiliar with them, the federal agency says.
A mortgage calculator with updated interest rates from lenders can be a good tool to know how much a mortgage will cost, and the CFPB's "Owning a Home" interactive, online toolkit with a rate checker tool can help people shop for a mortgage.
One key flaw to rate checker
The rate checker tool, and the entire toolkit, was released in beta mode in January. Users can look for lender rates in their state that are updated the previous day, check their rate options based on a range of their credit score, and compare how much in interest they'll be paying at different rates.
What it doesn't provide, however, is something that even the most basic mortgage calculator does: Show you how much your monthly payment will be.
That flaw aside, here are some of key parts of the CFPB tool:
Interest rates tailored to consumers. Plug in your credit score, location and what type of loan you want, along with the house price and down payment, and it will calculate interest rates for your situation, based on what's offered by lenders in your state. Other sites typically quote rates for borrowers with great credit and a large down payment, according to the CFPB, whose tool shows how many lenders are offering each rate.
Interest rate percentage translated into dollars. Other sites do this too, but the CFPB tool details the interest costs over the first five years of the loan and the entire length of the loan with two interest rates.
For example, a 30-year fixed-rate loan for $350,000 with an interest rate of 3.75 percent versus 4.25 percent translates into approximately $100 savings per month. In the first five years, more than $6,000 in mortgage payments would be saved, and the lower interest rate allows the borrower to pay off an additional $2,500 in principal in the first five years while making lower payments.
How to get a better interest rate
The CFPB tool also shows steps to take to work toward a better interest rate, such as considering all of the kinds of loans that make sense for you if you plan to buy in the next few months, and negotiating with lenders.
If you won't buy for several months, it suggests limiting your spending so you don't lower your credit score, improving your credit score so you can get a better interest rate, and saving for a large down payment.
"It's a very useful tool because it gets consumers thinking about where they are in the credit scoring before they go shopping for a loan," says Paul Golden, a spokesman for the National Endowment for Financial Education.
A credit score is one of the most important factors when shopping for a home loan, Golden says. A down payment, income and debt can be adjusted, but a credit score isn't as easily adjusted.
Credit card payment history and the amounts owed are important to a credit score, he says, making up 65 percent of it. A low income-to-debt ratio of 40-45 percent can also help, with the knowledge that gross income is being looked at by lenders, Golden says.
A lot of people don't know their credit score, or if they do, they may only know of one of the three main credit reporting agencies and that mortgage companies pick the middle of three scores to determine a customer's rate, says Sam Monreal, director of sales and marketing at the Heyl Group at Keller Williams Realty in Austin, Texas.
"A lot of clients don't fully understand their financial picture," Monreal says.
Too many resources can be overwhelming
There are many calculators and other online tools to help people shop for loan rates, which can overwhelm consumers and get them focusing too much on only getting the lowest loan rate.
"We're all very attracted by these low rates right now," Golden says.
The down payment, type of loan and not buying more house than you can afford are also important to consider.
The CFPB site is "a really great place to start," but should be used as a learning tool before talking to a mortgage expert, Monreal says. The average buyer looks for homes online for six to 12 months before buying, he says, and that time can be spent researching rates and improving credit scores.
Online calculators can be a good start, he says, but they often don't include home ownership costs such as property taxes and insurance.
Even with many risky features of mortgages now being restricted or unavailable since the financial crisis, mortgages have different terms and features that consumers may not understand. Loan terms typically vary from 15 to 30 years; loan types include Federal Housing Administration, Veterans Affairs and conventional loans; interest rates can be fixed or adjustable; and rates for the same consumer and loans can vary even if they have identical product features, according to the CFPB.
"People are definitely more proactive about digging in with mortgage information," Monreal says.
In the end, that can only be a good thing for mortgage shoppers, no matter what calculator they're using.