Warning for first-time homebuyers: Avoid this costly, 11th-hour mistake when buying a house

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First-time home buyers may be overwhelmed with the process of buying a home, but research shows that many are making a costly mistake when it comes to taking on a mortgage.

Before taking on a mortgage, many home buyers should research different rates for the mortgage they want, rather than taking one suggested by their bank or broker. They will find variations in borrowing costs throughout the process: The 30-year fixed has a higher interest rate than the 15-year, for instance, but that same 30-year rate also varies widely among lenders. 

Before taking on a mortgage, many home buyers should research different rates for the mortgage they want, rather than taking one suggested by their bank or broker.

The 30-year mortgage has a fixed rate of 7.3% as of Monday, according to Mortgage News Daily, while the 15-year has a rate of 6.65%. A jumbo loan, which buyers take on to buy more expensive homes — such as million-dollar homes in high-cost areas — will cost around 7.33%. 

Buyers can also find an even lower rate on adjustable-rate mortgages, but that rate adjusts later on. For example, if you take out a “5/1 ARM” — an adjustable rate mortgage fixed for the first five years and is adjusted every year thereafter — you’ll only pay a 7.07% rate for the first five years.

Rates are also pegged to the 10-year Treasury, so unless they “lock” in a rate with their lender, buyers can expect to see volatility on a day-to-day basis.

Beware of decision fatigue 

Why does all this matter for first-time homebuyers? Firstly, it’s important to have all the information at hand. Secondly, during the home buying process, if a first-time buyer encounters so many complications while choosing a mortgage, they may feel decision fatigue, and end up choosing the most convenient option.

But research shows it can be far cheaper to persist, process any first-time buyer anxiety, and pay attention to the fine print. 

In fact, getting just one additional rate quote from a lender, can save the typical borrower an average of $1,500 over the lifetime of the loan, according to this report by Freddie Mac
Five additional quotes could save buyers up to $3,000 in costs.

“The research is clear: It pays to shop around for the best mortgage terms,” the housing finance agency stated. 

Confusing menu of options

Banks offer a “myriad” of mortgage options to buyers, who run the gamut from sophisticated buyers to novices who are less able to identify cheaper loans, according to a new working paper distributed Monday by the National Bureau of Economic Research. 

This latest research found that home buyers in the U.K. who face higher costs are those borrowing large amounts, relative to their income and the value of their house. “These tend to be younger customers, and people who are buying a house for the first time,” the researchers stated. 

“Lenders thus price discriminate, offering menus with greater price dispersion to customer groups who may be less able to identify and avoid expensive options, or have fewer options to go elsewhere,” they added.

“They offer the cheaper options “to entice sophisticated customers who might be comparison shopping at multiple banks,” the researchers noted. “At the same time, the banks also want to offer expensive mortgages in case someone is careless or unable to choose well.”

It pays to shop around

And in some instances, banks suspect that certain customer groups are less able to choose from a variety of rates, “and thus present them with a menu with many expensive options,” the researchers added. “For customers in this group that do decide to proceed, they are more likely to select an expensive mortgage.”

Doing your due diligence can save big bucks. Freddie Mac stressed that when U.S. consumers search for five different rates online — by visiting a local bank, or making phone calls — they end up choosing the lowest of five rates. For a $500,000 loan, even one percentage point will have implications for the monthly payment. 

But why stop there? Aspiring homeowners should also shop for the lowest rates when comparing the duration of mortgages, and take fees into account, Freddie Mac advised. Fees include application fees, processing fees, and other loan origination fees.


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