The Value of Mortgage Shopping
“Kenny’s family is so poor that yesterday, they had to put their cardboard box up for a second mortgage.”
Previously, I provided a checklist of things to do if you’re preparing to move in the next 12 months. If you missed it, you can go back and check out my home buying preparation checklist here. Now, we’ll examine the value of mortgage shopping.
When you think about getting a mortgage, what’s the first thing that you think about? Paperwork? Reams and reams and reams of paperwork? Unpleasant feelings of knowing a lot less than the mortgage officer and being held hostage to their whims? Images of something akin to surgery…without the anesthesia?
If you’re like me, going through the process to get a mortgage is something you’d just as soon avoid at all costs.
Yet, when you actually go through the process of getting a mortgage, how long does it really take?
Let’s look at the Fannie Mae residential home loan application. You can put yourself to sleep by reading it here.
It’s five pages long, but one of them is just a continuation sheet where you explain something that you didn’t have space to in the application. Yes, there are a lot of spaces to fill out, but, in reality, you should know most of the information already. Most of the work required is documentation that backs up what you claim, such as a W-2 or a tax return.
I haven’t applied for a mortgage in several years (nor do I ever intend on having a mortgage again), so I don’t remember how long it took, but eyeballing this application, I’d guess 10-20 hours to fill it out and get all of the appropriate supporting documentation. It would vary depending on how organized your financial statements already were.
Because of our perception of the agony of dealing with the mortgage process, we do everything we can to make sure that we avoid going through anything more than the bare minimum to get the loan and to be done with it.
After all, let’s compare two activities few people would want to spend a weekend doing: car shopping and mortgage preparation. I’d be willing to bet that most of you would rather deal with used car salesmen all weekend.
So, you’d be willing to spend 16 hours of your time dealing with dodgy used car salespeople, haggling, test driving, negotiating, and sweating, for, what…a savings of, oh, say, $1,000? That’s a return of $62.50 per hour. Pretty decent money for a weekend’s worth of work.
Let’s go back to the mortgage application process. If gathering the documentation to support your mortgage application is 80% of the work in applying for a mortgage, then filling out a second mortgage application should take about four hours. Therefore, in a weekend’s worth of work, you could apply for two to four more mortgages.
What if that effort could save you a half a percent off of your mortgage, meaning, for example, that you get a 4.5% mortgage instead of a 5% mortgage? Would it be worth the time?
Monkey Brain doesn’t think so. Monkey Brain thinks that a half of a percent is a very small number, and when compared to the horror and misery involved with more mortgage applications, he uses a mental shortcut called a heuristic. He compares a half a percent to 16 hours and decides right there that it’s not worth the effort. Plus, losing this weekend is pain now. Paying more in a mortgage payment is pain later. Later doesn’t exist in Monkey Brain land, so he votes for pleasure now and tells you that there are better things to do this weekend.
Let’s look at the numbers, though. Assume you’re getting a $200,000 mortgage. The first lender offers 5% on a 30 year mortgage. Here’s what the numbers tally up to:
Total interest paid: $164,813.40 (yikes!)
Now, let’s assume that with 16 hours more work, you could shop around and find another lender willing to offer 4.5% on the same mortgage. Here’s what you get for your work:
Total interest paid: $143,739.40
Difference: Save $21,074.00
That is an hourly return of $1,317.13 on your effort to reduce the rate by a half of a percent.
Let’s take this one step further and cut Monkey Brain off at the pass again.
Monkey Brain will go along with this. $1,317.13 per hour is a rate that, unless you are Donald Trump, your Monkey Brain cannot refuse.
However, he’s still going to try to get his way. There’s $58.88 a month which you’ve “freed up” that Monkey Brain wants. That’s a lot of IHOP pancakes he could convince you to stuff down your gullet.
But, you’ve already mentally committed to paying $1,013.71 a month. So, why not just go ahead and pay that? By doing so, you will pay off your loan three years and two months early, and you’ll save an additional $17,124.01, meaning, in total, you could save $38,198.01 off of the interest that you were willing to pay just to avoid 16 hours of additional discomfort in shopping for a new mortgage.
That’s $2,387.38 an hour for your time.
How awful does shopping for a better mortgage deal sound now?
Did you shop for a mortgage? Was it worth it? If you didn’t, do you regret it now? Tell us about your experiences in the comments below!