Photo (cc) by woodleywonderworks
When you want to shop for just about anything these days, the way to do it is online. With the click of a mouse, you can compare prices from dozens – even hundreds – of online merchants and instantly find the best deal.
You’d think the same holds true when you shop for something like a mortgage. There are countless sites that suggest they provide an unbiased and objective list of interest rates on everything from mortgages to checking accounts.
But what if they’re not unbiased and objective?
When you’re shopping for a blouse, losing out on the best deal could cost you a few bucks. When you’re shopping for a house, the stakes are much higher. For example, suppose a website tells you the best deal on a $400,000, 30-year mortgage is 5.5 percent – when actually a 5 percent mortgage is available elsewhere. A half-percent may not sound like much, but on a $400,000 mortgage, it’s $123.87 per month. Pay it for 30 years, and you’re out an extra $44,593.20.
That’s a lot of blouses.
The video below shows you what I’m talking about. Watch it and meet me on the other side for more…
How you think the system works
When I refinanced my mortgage back in 2009, I did what I suspect many people do: I went to a popular interest rate search site, told it how much I wanted to borrow, the kind of mortgage I wanted, and where I lived. Then I hit the “search” button, and in a split-second, I had a list of potential lenders.
Were the lenders that popped up on my rate search the best available in my area? I couldn’t be blamed for thinking so. After all, the words, “the best and latest mortgage rates” were printed at the top of the results page. So I sorted the list by lowest APR and started calling lenders. After talking to several, as well as my existing lender, I picked one and closed the deal.
Presumably, this is the same thing tens of thousands of other mortgage shoppers do. They just assume they’re being shown the best rates.
The way the system actually works
Although Money Talks News has had an online presence since the mid-’90s, for most of that time we didn’t try to make money from the site. We simply used the Web as a way to deliver additional information to TV news viewers.
Starting in 2010, however, we started trying to build traffic and create income. One way of making money you see around this article: ads. But another way to make money from a personal-finance site is to provide rate searches.
There are only a handful of companies that actually poll banks and other lenders to find current rates. The companies that do that polling offer their findings to hundreds of sites. So when we decided to help our readers find the best deals on mortgages, credit cards, savings accounts, etc., we talked to a couple to find out how much it would cost.
How rate searches make money
What we learned is having a comprehensive rate search on our site wouldn’t cost us anything.
As it turns out, lenders (like mortgage companies) pay for leads. In other words, if you click on a link in our mortgage search, or presumably those at other sites, the lender pays a fee to the company providing the information, which they then split with the site. So sites like ours don’t pay to show you these rates – we get paid.
When I learned how the system worked, I was happy. Being able to provide objective rate information to our readers is good – and so is making money when they clicked a link. There’s just one elephant in the room: Not all lenders agree to pay the information provider’s fee. That gives the information provider an incentive to only show those that do, or at least to emphasize those that do.
How do they do this? Several ways.
First, links. Do a mortgage search on most sites, including this one, and some of the lenders you’ll see will include links taking you directly to them. Other lenders won’t. The lenders that pay for referrals are the ones with the links. Want to deal with one that doesn’t have a link? Find their Web address yourself.
On some sites, when you do a search, the “default” ranking shows lenders paying referral fees at the top. Reorder the list by ranking it by APR, and you’ll get a list that still has paying lenders at the top – even though they don’t have the lowest APR.
And then there are sites that don’t display non-paying lenders at all. If they don’t pay to show up in the search, they’re not presented. If all the lenders you see have links, that’s what you’re looking at.
So what’s wrong with that?
A few months ago, I wrote a post called Why House Hunters Shouldn’t Watch HGTV’s House Hunters. In that post, I explained that “reality TV” is a production style, not a label indicating that something is genuine. House Hunters is partially staged. Therefore it’s not “reality.” Not saying so is a disservice to viewers who may rely on it to educate themselves about the biggest financial decision they’ll ever make.
The same thing applies here. If sites only want to show lenders that pay, fine. It’s a free country. But they shouldn’t imply they’re showing the best available rates if they’re not. It’s a disservice to readers. And the result could be that the site makes a couple of bucks, and their trusting reader ends up poorer by $44,593.20.
What should you do?
This was the question I asked myself once I understood how the system works. Internet rate searches are useful, and I wanted our readers to have access to them. They’re also a way to make money for our site.
But I’m a journalist first. That’s why I wrote this story.
Within narrow limits, I can’t control what the company providing our rate information shows you. But I can tell you how the system works, both here and on other sites.
Bottom line? Use rate searches. They give you an idea of what’s happening, and they may just provide the best available deals in your area. But don’t rely solely on them.
As I said above, when I refinanced my house, I used a rate search to find potential lenders, but I also checked with my existing mortgage company. Checking rates with my existing lender gave me confidence that the rates I found online were indeed better. Had I known what I know now, I would have tried another couple of local sources to make sure I was getting the best deal.
And if this is the first article you’ve read warning you about the limitations of online rate searches, ask yourself why. From reality TV to online rate searches, there seems to be an awful lot of people out there willing to swap the truth for a buck or two.