The start of a new year is a popular time for setting resolutions around personal finances. There is an increased sense of urgency if one of your goals is to buy a home.
A common first step in assessing your complete financial picture is to download a budgeting app. While categorizing your spending might seem like a logical step for analyzing where your dollars are going, many users fail to fully engage with the app and therefore get very little benefit.
In fact, Anish Acharya, a general partner at venture capital firm Andreessen Horowitz, recently wrote a piece on the company’s website that explained personal finance management tools have not seen the adoption most expected. He asserted that “too often, these budgeting apps are akin to calorie counting — it’s usually easier to just uninstall the app than to change our financial choices.”
If budgeting apps don’t help consumers with the seismic shift they need to see in order to meet their goals, what are the other options? Is it even possible to save thousands of dollars every year without having to dramatically change your financial behavior?
For individuals or families considering buying a home, the short answer is, “Yes.” As the CEO of a technology company that helps clients find a home loan for their needs, I’ve seen that this kind of significant cost-saving is possible by doing one thing: committing yourself to effectively shopping for a mortgage.
Why comparison shop?
Consumers comparison shop for nearly every purchase, including clothing, hotels and flights. According to research by Expedia, travelers, on average, search a flight 48 times before booking. Or, consider the experiences you’ve had shopping for a car. You might be willing to visit a dealership five, 10 or 20 miles away if you knew you’d save significantly on the price, right?
So how is it possible that consumers are content to see one loan offer and move forward without shopping around?
I believe it’s a mix of two longstanding factors:
1. Most homebuyers get connected to a mortgage expert through a referral from a family member or friend and feel bad for questioning that recommendation.
2. They don’t feel confident that they know enough about loans and lending to ask the right questions when comparing numbers.
In 2015, the Consumer Finance Protection Bureau reported that “almost half of consumers who take out a mortgage fail to shop prior to filling out an application.” Nearly 50% of homebuyers are willing to make the largest financial investment of their lives without making sure they are getting the best deal (even though mortgage rates can vary between lenders by as much as 1%). In fact, rates can vary within the same financial institution depending on which loan originator you work with.
This fluctuation is possible because the interest rate a lender offers is largely determined by the commission they pay to their salesperson (often referred to as a “loan officer”) and many lenders allow their loan officers to choose from different commission plans.
For example, if you lower the interest rate on a $300,000 mortgage by 0.25% (e.g., 3.875% to 3.625%), you will save $747 your first year and $7,135 in the first 10 years of your mortgage. That is money that can then be used toward other financial goals, like saving for retirement or a child’s college tuition.
The Bottom Line
It’s critical buyers know all of their mortgage options. If you shop around, you have the opportunity to save a substantial amount of money each month and you don’t need to change how you manage your personal finances, as those apps might suggest.
When the time comes to purchase a home, don’t settle for the first lender that you’re referred to. Instead, shop for your mortgage, the way you would for any other big purchase, and you’ll get all the benefits that savings apps espouse without all the work.