Borrowers and would-be homeowners have been grappling with high mortgage rates for some time, making the road to homeownership very difficult for many. As of September 3, the 30-year average mortgage rate stands at 6.71%, according to Freddie Mac. In comparison, a year ago at this time, it stood at 6.50%. And in stark contrast, in the corresponding week in 2021, it stood at 2.87%.
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And now, a new Bankrate analysis found that at least 83% of borrowers in the country’s 10 most populous cities overpay on their mortgages. The numbers are staggering: These overpayments cost them between $74,000 and $149,000 over the life of a 30-year mortgage. The analysis also found a geographical discrepancy. Los Angeles, Miami, and New York City are among the most populous cities with mortgage overpayments. Jeff Ostrowski, Bankrate’s housing market analyst, said he found the findings surprising, as these overpayments are commonplace across geographies and income levels.
“In terms of the metro area ranking, I was surprised that LA, Miami and New York have such high levels of overpayment,” he said. “I think of buyers in those markets as being affluent and sophisticated, so I didn’t expect them to give up money on their mortgages.”
Regional discrepancies
Ostrowski said that while it’s hard to pinpoint exactly why overpayments are happening in specific metro areas, these are all expensive or fast-moving markets where competition shortens the time available for rate comparison, and borrowers arrive at closing under significant financial and emotional pressure.
“When closing the sale is the buyer’s priority, the incentive to shop for mortgage rates could diminish, and lenders could benefit accordingly,” he said.
The average national annual mortgage overpayment is $3,343 for the typical U.S. borrower, according to the analysis.
However, in the Los Angeles metro area, borrowers who overpay do so by an average of $8,139 annually, which, over a 30-year loan, represents $150,000 per borrower.
In the Miami metro area, borrowers overpay $6,358, or $118,000 over the life of the loan. Meanwhile, in the New York City metro area, they overpay $6,012, or $110,836 over the life of the loan.
Finally, while the Philadelphia metro area ranks last among the 10 most populous metros for mortgage overpayments, homeowners still lose an average of $4,425 per year, or $78,186 over the life of their mortgage.
Another eye-popping data point is that nationally, 87% are overpaying, a fact little talked about. Ostrowski said that overall, the U.S. mortgage market works well, as homeownership rates are high, and mortgages are readily available.
“However, mortgages remain complicated and hard to shop for. And the mortgage market is designed in a way that discourages consumers from finding the best deal,” he said.
Steve Sexton, CEO of Sexton Advisory Group, echoed the sentiment, noting that when you’re buying a house, you’re dealing with inspections, appraisals, insurance, escrow, moving and a stack of documents.
“The mortgage can become one more thing you’re trying to get across the finish line,” Sexton said. “I think that’s the bigger lesson from this research: consumers tend to think of a mortgage rate as something that’s simply given to them based on the market and their credit.”
What’s driving overpayments?
The primary culprit is not shopping around, experts said. Instead, borrowers often rely on recommendations from their real estate agents or accept an offer from their bank without obtaining a competing offer, according to Bankrate’s Ostrowski. He argued that this isn’t surprising, as the mortgage decision is one of many complex factors for a homebuyer, who’s also navigating details about school districts, commute times and renovation costs.
“And even when borrowers are motivated to do some bargain-hunting, the mortgage industry doesn’t make it easy to compare costs,” Ostrowski added.
Sexton agreed, saying that much of it comes down to people not shopping for a mortgage nearly as aggressively as they shop for a house. Of course, there’s a convenience factor at play, he said, as buyers often go with their existing bank, a lender recommended by their real estate agent, or whoever can get the loan closed quickly.
“There’s nothing inherently wrong with any of those options, but you still need something to compare them against,” he said, adding that a quarter-point or half-point difference in rate may not sound dramatic when you’re trying to get through closing.
But on a large mortgage, particularly in a market like LA, it can translate into thousands of dollars a year, he said.
What can homeowners do to avoid overpaying?
Consumer finance expert Austin Kilgore, analyst with the Achieve Center for Consumer Insights, said that homebuying has become increasingly integrated, with real estate brokerages, lenders, title companies and other providers operating under common ownership or preferred-partner relationships. This, he said, has created an environment that discourages mortgage shopping, especially in home-purchase transactions.
“It may offer a seamless and often tech-enabled process, but it can also discourage shopping for the best deal,” Kilgore said.
It’s also important to keep in mind the cheapest mortgage isn’t automatically the best mortgage, he added.
“Reliability, speed and a better digital experience can have real value. That said, those benefits become much harder to justify when the price difference reaches thousands of dollars,” he said.
To avoid overpayments, experts recommended getting at least three quotes, in the same time window, as mortgage rates move, and for comparable loan structures.
And when you compare those offers, don’t look at the interest rate alone, Sexton noted; ask for the annual percentage rate (APR), lender fees, points and total closing costs.
“A lender can advertise an attractive rate and then charge you thousands of dollars to buy that rate down. You want to understand what the loan is actually costing you,” he said. “Then go back to the lenders and tell them what you’ve been offered elsewhere. You’d be surprised how often there is room for a better offer once a lender knows they’re competing for your business.”
Finally, Sexton said that borrowers should not become so focused on getting the house that they stop paying attention to how they’re financing it.
“People will negotiate $15,000 off the purchase price and feel great about it, but then potentially give that savings right back by accepting a higher mortgage rate for the next several years,” he added.
