‘Encouraged shopping’ builds consumers’ knowledge, confidence with mortgage matters, consumer bureau finds

A study conducted in 2016 showed that “encouraged shopping” – the additional shopping prompted by encouraging borrowers to shop – increases consumers’ knowledge about and confidence in their ability to deal with mortgage-related issues, the Bureau of Consumer Financial Protection (BCFP) reported Tuesday.

The study was conducted by the bureau’s Office of Research, which surveyed thousands of consumers in the U.S. throughout their homebuying processes in the spring and summer of 2016. It was a randomized controlled trial, which allows researchers to estimate the effects caused by a given policy, or estimate “causation.” At the beginning of the study, participants were assigned randomly to a “control group” or a “treatment group.” Participants in these groups were treated identically during the study except for one key difference: the treatment group was encouraged to shop for a mortgage and to engage in shopping-related behaviors (for example, obtain pre-approval letters). The control group was not encouraged to shop in this way.

The findings, in summary:

  • Consumers’ knowledge is highest on basic mortgage concepts, such as the effect of extra payments on total mortgage costs, but lower for specific terms like discount points or the difference between interest rates and APR (annual percentage rate).
  • Knowledge is lower among respondents from certain groups: first-time homebuyers, those who are not employed full-time, lower income consumers, and consumers with subprime credit scores.
  • Consumers can learn to be more informed; over the course of their homebuying process, they tend to become more knowledgeable about certain pieces of information.
  • Overall knowledge still remains low on some topics. For instance, many consumers incorrectly believe that submitting multiple mortgage applications within the same week will detrimentally affect their credit score, perhaps because they (correctly, the bureau states) know about the negative effects of credit applications over longer time periods.

Prospective homebuyers took a baseline survey of nine questions at the beginning of the study and biweekly check-in surveys for up to three months or until they bought a home, whichever occurred sooner. The research team analyzed variation in overall mortgage knowledge across respondents to see what demographic characteristics were associated with different levels of knowledge. It “found significant differences” across different groups – such as those with different levels of homebuying experience, ages, education, employment status, income, and credit scores.

The BCFP released the report on this “Know Before You Owe” study in three briefs; it was revealed via a website post Tuesday. It adds that other, recent studies showed more than 30 percent of borrowers reported not comparison-shopping for their mortgage, and more than 75 percent of reported applying for a mortgage with only one lender.

The bureau says that its own 2015 national survey on mortgage originations “suggests that failing to comparison shop for a mortgage costs the average homebuyer approximately $300 per year and many thousands of dollars over the life of the loan.”

Know Before You Owe: Mortgage Shopping Study:

Study overview and methodology (Brief 1)

Does shopping for a mortgage make consumers better off? (Brief 2)

What do prospective homebuyers know about mortgages and mortgage shopping? (Brief 3)