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Buying a house - it's often the biggest financial transaction in a person's life. So with all that money at stake, consider this - many Americans don't bother to shop around. They don't search for better interest rates for a mortgage. That's one take-home in a new report from the Consumer Financial Protection Bureau. NPR's Chris Arnold reports.
CHRIS ARNOLD, BYLINE: Many Americans really love getting a good deal. We'll shop around to save 10 or 20 bucks on a pair of pants or winter coats for the kids. But with mortgages, nearly half of us don't even call around to different banks to hear what interest rates they're offering. And 75 percent of us - we only fill out an application with one lender. Richard Cordray is the head of the Consumer Financial Protection Bureau. He sat down with NPR to talk about the report.
RICARD CORDRAY: It is a surprising finding, and it suggests that they're still fairly intimidated by the mortgage transaction. Or they're a little distracted because at the same time, they're picking out a house.
ARNOLD: But especially in these days of stagnant wages, this is serious money. Cordray says on a $200,000 loan - a loan at four percent versus four-and-a-half percent - that is a big difference.
CORDRAY: The difference in even a half percent of interest racks up pretty quickly over five years to about $3,500. And over the life of a 30-year loan, obviously far more than that.
ARNOLD: You also pay off more principal more quickly with a lower rate. So why don't more people shop around? Are they intimidated, confused, distracted, all of the above? We called up Brigitte Madrian. She's a behavioral economist at Harvard, and she studies how human nature gets in the way of us making better financial decisions.
BRIGITTE MADRIAN: So one is that interest rates seem small.
ARNOLD: A half of 1 percent difference - our brains say, well, whatever.
MADRIAN: Consumers don't really understand compound interest. And it's the effect of these small interest rate differences applied to a large sum of money - which a mortgage is - and then compounded over time.
ARNOLD: Another thing our brains do, Madrian says, is that we tend to look at cost savings in relative terms.
MADRIAN: So if a store is offering a discount - $10 on a $30 pair of shoes - that's a 33 percent discount - people will drive 20 minutes out of their way because it's a big relative difference in price whereas they might not drive 20 minutes out of their way to save $300 on a car if that $300 is only 1 percent of the price of the car because 1 percent seems small.
ARNOLD: There's actually a name for this behavior if you want to impress your friends. Madrian says it's called the Weber-Fechner law of psychophysics. So OK. Many of us humans could use some help with our financial decisions. That's why in addition to coming out with the report, Richard Cordray says the CFPB is also today launching a toolkit on its website.
CORDRAY: A set of tools which will help empower consumers to shop more effectively and make the best deals they can for themselves and their families.
ARNOLD: There's a rate tracker tool. Cordray says you can plug in your credit score and ZIP code and other info, and it'll tell you the range of interest rates that lenders are offering that day. Of course, there's a lot of financial information out there on the Internet - some good, some bad, some ugly. Cordray says one goal here is to give people some tools that they can trust since his agency is not trying to sell you anything. Chris Arnold, NPR News.
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