Consider Telling Your Customers ‘You Better Shop Around’
May 2, 2016
Consumers often comparison shop for cars and hotel rooms. However, when confronted with the largest purchase they will ever likely make, buying a home, one-third of shoppers get a single mortgage quote, notes 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 homebuyers polled between January and March of 2014 for the company’s monthly National Housing Survey/Home Purchase Sentiment Index. They found that about one-third — 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.
Holding all other attributes equal, they also found that borrowers age 50 and older were 16 percent less likely to obtain a quote 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 nonminorities.
Of first-time buyers who said they only obtained one mortgage quote, 55 percent said this was because they were satisfied with the first quote they received, compared with 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.
In addition, first-time buyers are more likely to report surprises at closing time. Regardless of age, income, or experience, all borrowers will benefit from getting the best possible deal, so that they can sustain their mortgage, even if their income(s) change.
Who Influences Their Decisions?
According to Cai and Shahdad’s research, the answer has much to do with their experience and influence of friends or family on the homebuying process. Again holding all other attributes equal, first-time buyers are 31 percent more likely than repeat borrowers to be influenced by friends and family, 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 motivations for mortgage shopping. According to this research, 70 percent of borrowers picked their lender before deciding what kind of loan they wanted. These borrowers may be looking for a specific lender, perhaps one in their community, or one that friends or family have worked with before.
What It Means for Lenders
Does it hurt lenders to encourage consumers to mortgage shop?
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 (like interest rate and loan amount) that they are seeking in a loan, 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 also says 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.”
Encouraging homebuyers to shop for a mortgage may seem to go against lenders’ interests if those borrowers go with another lender. However, 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 result in other home purchases or business in the future.
After all, as Sy Syms used to say about shopping for clothing, “an educated consumer is (the) best customer.”
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