As an educator, it is easy to tell students that before they buy any financial product (or any product for that matter), they should comparison shop. Far better, in my mind, to have students discover on their own the dollar and cents impact of spending a little extra time comparing alternatives, which is why I love this new “Check Interest Rates for your Situation” tool from the CFPB.
The tool allows consumers to see the range of interest rates on home mortgage loans available based on their situation (state of residence, credit score, size of loan, amount of down payment, loan type. Note that the data points change daily, so the example I provide today (2/23/15) will likely have different values if you replicate it in the future.
First, use this data to create a scenario using the CFPB tool:
- Credit score range: 680-699
- State: California
- House price: $200,000 (find median home values by state here)
- Down payment: 20%
- Rate type: Fixed
- Loan term: 30 years
- Loan type: Conventional
The results indicate the median interest rate for this profile would be 4.313% with the following distribution:
- 4.125%: 2 lenders offering this rate
- 4.25%: 6 lenders
- 4.375%: 6 lenders
- 4.75%: 2 lenders
So, if I was the typical consumer who didn’t shop around for a mortgage loan (almost half do not), and had the misfortune of choosing the high cost lender (4.75%) instead of the low-cost lender (4.125%), how much more would I pay in interest over the life of the loan (30 years)?
Answer: $21,311 per the tool (interest on high rate loan of $140,469 vs. interest on low rate loan of $119,158).
So, assuming you decide to spend about 5 extra hours comparing lenders to find this low interest rate low, your hourly rate works out to a little over $4,000. Do you think it is worth the effort?
