The Consumer Financial Protection Bureau (CFPB) recently unveiled an internet-based tool designed to help consumers shop effectively for the lowest possible mortgage interest rate. For this tool to work, it must help mortgage shoppers distinguish between rate differences that are justified, which borrowers would have to pay in a perfect market no matter how effectively they shop; and rate differences that arise because lenders know more than borrowers and control the process, which might be overcome by effective shopping.
I have been examining the CFPB tool to see how well it meets this challenge, and will report on it next week. This article lays the groundwork by looking at the different sources of rate differences.
Justifiable Rate Differences
Some borrowers pay higher interest rates than others for reasons that have nothing to do with their knowledge or ability to shop. They would pay more even in a perfect market.
Transaction Timing Differences: The rate quoted to one borrower may differ from the rate quoted to another if the quotes apply to different times and the market changed within that period.
Mortgage lenders set their rates every morning after secondary markets have opened and they have checked the opening prices. The rates posted may last through the day, or they may not, depending on what happens in secondary markets during the day.