It’s no surprise that buying a house in America these days is expensive, and not just because home prices have risen back to the level they were at in early 2008.
The simple fact that most consumers forget is that, over the life of a mortgage loan, the interest on that loan compounds, meaning that even small differences in the interest rate that they get at the outset of their mortgage can, over time, at up to a lot more money paid when their home is finally paid off.
Looking at it that way, the best thing for consumers to do would be to shop around for the best mortgage rate possible. It seems to make sense but, according to the Consumer Financial Protection Bureau (CFPB), approximately 50% of home buyers in the United States only contact one lender or mortgage broker when they are preparing to purchase a home. Compare that to the typical time a consumer spends choosing a new computer, 4 hours, and the disparity is obvious.
Of course the mortgage application process is extremely confusing and, when a consumer has complicated finances as well, it can be even worse. On average it takes almost 2 months to close on a mortgage, according to Christine Pratt. Ms. Pratt is a senior analyst at the Aite Group and says that applying for mortgages “a very unwieldy process”.
For that reason she says, many consumers don’t do nearly as much research and due diligence as they should instead sticking with a bank that they know and trust. Either that or they end up paying a mortgage broker extra money in order to take care of all the complicated paperwork.
When you throw in imperfect credit and unsteady incomes, the process gets even more grueling. After the financial crisis many banks tightened their standards greatly and, because of new regulations that were approved last year, banks must now go to extra lengths in order to prove that borrowers will be able to cover the mortgage payments that their new home mortgage will bring.
Stacy Titsworth, a regional manager at PNC Mortgage, says that ” The guidelines are so meticulous that customers do have to be overly prepared.”
And therein lies the problem; the home mortgage process has become so difficult that, rather than having to deal with the stress, home owners are instead paying more in interest.
For example, if you take a $350,000 loan with a 30 year fixed interest rate of 4.25%, the monthly mortgage loan will be $100 higher than someone who paid just 0.5 points lower. That former homeowner will, after 5 years, have paid 6000 more in interest and, even worse, have paid off $2500 less on their principle.
One bit of good news however is that mortgage rates right now are at the lowest point that they’ve been since May 2013. Still, a little bit of shopping around and the ability to handle a little bit more stress could save the average homeowner quite a bit of money over the life of a 30 year mortgage loan.