Yes, Mortgage Rates Are Low, But You May Still Be Paying Too Much

Beyond the Headlines: Personal finance news and research you may have missed

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If you’ve been following the financial news, or just keeping close track of your own spending, you’re all too familiar with paying higher prices.

Overall inflation jumped to 5.4% in June as higher prices for food, gas, and hotel rooms cramped budgets for summer trips. Then there are house prices, which are still rising so fast that saving up for a down payment is a goal that’s getting out of reach for many renters—and that’s not even taking into account that their rent is rapidly climbing too.

You may also be keeping up with the debate on extra pandemic-era unemployment benefits and whether they’re the culprit for the country’s counterintuitive job situation: record job openings and elevated unemployment.

And of course, there’s the good news most everyone with kids at home became aware of last week if they weren’t already—the 2021 federal child tax credit. Not only has it been expanded, but it’s being doled out in monthly installments for the first time ever. The first such installment hit bank accounts July 15 to the tune of $15 billion.

But here’s what you may not have heard, especially if you were busy budgeting in your monthly tax credit or scouring job listings for a better position. Did you know that if you don’t shop around and negotiate, you may very well overpay when getting a mortgage—especially when overall rates are relatively low? And how about those extra unemployment benefits? Did you know a new way of quantifying the downside suggests you’d have to pay the average person thousands of dollars a week to keep them from returning to work?

To reach beyond the biggest headlines, we scoured the latest research, surveys, studies, and commentary to bring you the most interesting and relevant personal finance news you may have missed.

What We Found

Yes, Mortgage Rates Are Low, But You May Still Be Paying Too Much

With today’s low mortgage rates, you might be tempted to go with the first offer you see. But a new study shows there’s a real chance you’ll overpay, especially if you’re not that financially knowledgeable, don’t shop around, and don’t negotiate for a home loan. In fact, when rates are relatively low like they are now, overpaying is an even bigger risk because borrowers are less apt to put effort into shopping around, the study shows.

Specifically, identical customers getting identical 30-year, fixed-rate loans on the same day—in some cases even from the same lender—received a rate as much as 54 basis points higher (or more than half a percentage point), according to economists at the Federal Reserve and a Swiss bank who analyzed mortgage lending data for a paper published earlier this year.  On a typical $250,000 loan, that would equate to a $6,500 upfront payment, or $80 a month.

The economists, who studied detailed data on the rates lenders were offering as well as those customers were actually locking in, found that customers with lower credit scores and less home buying experience had the most variation in rates, suggesting that a lack of financial savvy was a major factor in overpaying. The fact that some disparities were even at the same branch or applied to the same loan officer suggested borrowers who negotiated were better off.

“A large fraction of the borrower population in the U.S. overpays for mortgages, and a key reason for this seems to be a lack of financial sophistication,” the economists wrote.

Not only that, but these researchers looked at mortgage origination records and survey data, and found even more evidence that those who knew the most about mortgage rates and shopped around more got a meaningful discount. Buyers who got Federal Housing Administration loans—which target lower-income borrowers—were especially prone to overpaying, the economists said.

How Much Would Your Unemployment Check Have to Be to Keep You Home?

If job openings are at a record high, why are people still filing for unemployment at relatively high levels instead of snapping up jobs? While many economists are still trying to figure out this conundrum, Republican state governors landed on an explanation months ago—enhanced unemployment benefits provided by the federal government (currently an extra $300 a week) have been enticing people to stay home during the pandemic. In fact, most red states have cut off the extra benefits ahead of their September expiration.

But one recent analysis would indicate the extra money is only a small drag on the recovering job market. While there is a disincentive among lower-wage workers in some states, most people would still rather have a job than live off unemployment, Oren Klachkin, lead U.S. economist for Oxford Economics, wrote in a commentary.

Drawing on research from earlier this year that showed only a small share of people would choose staying on unemployment rolls over getting a job, Klachkin estimates that benefits would have to be quite generous indeed—averaging anywhere from $1,600 a week in North Dakota to $3,200 a week in Massachusetts—to successfully tempt someone to avoid getting back to work.

Unemployment recipients realize the benefits won’t last forever, Klachkin said, and that it’s usually better to take a permanent job and avoid the risk of a long jobless spell. (In fact, his range is so big because these factors can vary a lot by state; for instance, people in North Dakota tend to be unemployed for less time than in Massachusetts, he said.)

On top of that, since January, states with more generous jobless benefits didn’t have significantly slower job growth than those states that paid less, according to Klachkin’s analysis. Altogether, the evidence points to enhanced unemployment benefits discouraging only a small share of workers, mainly in low-wage positions, Klachin said. And even then, data shows employment among low-wage workers being up almost 30% since April 2020, he noted.

So if it’s not unemployment benefits keeping workers at home, what is? The pandemic is still the primary factor, Klachin maintains: States that saw downturns in COVID-19 cases and loosened business restrictions quickly saw much faster job-market healing than those that reopened more cautiously, he said.

What Drives Home Prices Even Higher? Needing a Car

Homebuyers vying for real estate listings have been waiting for more houses to come on the market, and it’s finally happening, at least a little. More houses for sale should mean less competition and a possible respite from home prices that have run wild during this pandemic-era real estate boom.

Of course, not every location is as fiercely competitive. Thanks to new opportunities for telecommuting, suburbs, rural areas, and small towns have all drawn increased interest from house hunters since the pandemic began, according to a new report from online real estate company Redfin.

In fact, 56% of homes in car-dependent areas sold for above asking price in May, compared to 36% of homes in transit-accessible neighborhoods. And the typical home in a car-dependent area was on the market for 19 days before going under contract, half the time for a transit-accessible home.

Since January 2020, homes in car-dependent areas have gained twice as much value—with sale prices rising about 33% versus 16%, according to Redfin’s data on real estate searches. Car-dependent homes now sell for a median of $418,100, versus $540,500 for transit-oriented ones, Redfin said. Both are record highs.

In Lending Shark Tank, Poor Business Owners Are Minnows

How’s this for a catch-22: Not only can having limited means make it harder for aspiring entrepreneurs to get a business loan, but not getting a business loan can keep those entrepreneurs with limited means, according to a new economic analysis.

A group of economists whose work was recently published on the New York Federal Reserve’s Liberty Street Economics site examined small business loan applications from one large European bank and found that five years after applying for a loan, small business owners who were approved for loans had incomes 11% higher than those who were denied loans, partly because the borrowed funds enable them to make investments that pay off in the future.

How could the group quantify this? In order to assess what they assumed were very similar clients in terms of creditworthiness, the economists compared applicants who barely made the cut to get a loan, to those who just missed the cut.

The results suggest that it’s easy to get stuck in a trap of income inequality: entrepreneurs who can’t come up with collateral for loans are hindered from growth not necessarily because their ideas are unworthy, but simply because they are already at the bottom of the income ladder.

The math may be complicated, but the remedy the researchers suggested was simple: “Extending credit to individuals with good investment ideas improves economic mobility and reduces income inequality.”

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.