The Consumer Financial Protection Bureau (CFPB), has recently released a suite of tools for consumers who are thinking about buying a home. The concept is good; in my 25 years as a mortgage lender, I have spent a great deal of time educating the public about basic financial principles.
Here’s where CFPB has missed the mark: one of the tools they provide is called “Check interest rates for your situation.” CFPB claims, “Our data comes from actual lenders and is updated every day.” The user enters a loan amount, down payment, state and credit score and will see a range of interest rates and the number of lenders in the survey offering those rates.
This sounds like a good idea, but it misses the mark in a couple of important areas. The data CFPB delivers with their well-intentioned site can be misleading.
First, the rates generated are (I presume) APRs, which are very different from the note rate. This is because discount points, paid up front to reduce the interest rate, are part of the APR calculation. Here’s what I mean:
A $400,000 mortgage at 3.625% and no discount points will carry an APR of around 3.689%.
The borrower could get the same mortgage with an APR of 3.309% (note rate 3.25%)—but they’d pay 2.8% of the loan amount to get that rate. CFPB’s model doesn’t consider this.
They also disregard the potential cost of mortgage insurance. A buyer with a credit score of 740 and a down payment of 10% will pay mortgage insurance of .44%. That would amount to $132 a month. A buyer with a 680 score would pay $171 for insurance on the same loan.
Furthermore, they don’t take into account many other factors that affect interest rate: is the loan for a purchase or refinance? Is the borrower taking cash out? Will they have an impound account? All will affect the cost of the loan.
CFPB suggests that the consumer should negotiate with three lenders or more, getting Good Faith Estimates from each one, then using those documents as a negotiating tool. There are two problems with this: first, the GFE is not a useful consumer document. It does not itemize the actual costs of the loan paid by the borrower. Second, under the current Dodd/Frank regulations, lenders cannot do ad-hoc price reductions for individual borrowers. This is true for brokers and direct lenders as well.
Finally, the comparison tool (although it is a good start) disregards other costs and fees that can change from one lender to the next. Lenders with the lowest price (like on-line call-center mortgage brokers) often have other costs and fees that are not reflected in the GFE.
What is useful in CFPB’s mortgage tool is the credit score slider. All lenders use “risk-based pricing” today. This means that a borrower with a lower credit score will pay a higher rate than one with a higher score. We have seen many instances where raising a borrower’s FICO score by just 5 points has saved literally thousands of dollars on their loan.
In fairness, the mortgage tool is a Beta version. This means they recognize it as a work in progress. Still, with the complexity of the mortgage process, the fact remains that the best way to decide on the best mortgage choice for you is an experienced, trusted mortgage advisor.
I happen to know one of those guys.