Beware of mind games when shopping mortgage rates
Sometimes our brain gets in the way of a good decision. It’s called “cognitive bias,” and it happens when our mind tricks us into making irrational choices. We think something is true — and we just go with it.
Here’s how to keep your mind from messing with you when shopping for the best mortgage rate.
Raise the anchor
Maybe your ears perked up when you heard about 3.5% mortgage rates last summer. You started to think about buying a home or possibly refinancing. But now rates are closer to 4.5%.
In this case, the mind game at work is called “anchoring.” You just can’t get that 3.5% rate out of your head.
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"Once you have that number in your mind, it's very hard for you to be flexible about proceeding with a financial decision," says Mary Gresham, a psychologist in Atlanta. “You might think, 'Well, I'll just wait until it goes back [down] to that.’"
But if rates keep moving higher, you might wish later that you had snagged that “high” 4.5% rate.
Don’t get hung up on framing
Another way our brain sometimes blocks our best interests is through “framing” — drawing varying conclusions from the same information when it’s presented differently.
"Percentages look small," says Dan Ariely, professor of psychology and behavioral economics at Duke University. "Imagine if instead, mortgages were framed not in terms of percentages but in terms of how much we're going to pay in interest over the life of the mortgage." This information is available to borrowers, but it's generally not how they comparison shop for a loan, Ariely says.
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The difference between a 4.75% and a 4.5% rate might not seem like big — but what if you considered total costs? You may be less willing to choose a product that charged $25,000 more in interest over the life of the loan and had $3,000 more in closing fees.
Slow and steady wins the rate
Avoiding irrational thinking requires knowing a bit about how your thought processes work.
"We have two brain systems that do our finances for us,” Gresham says. “One is what we call the fast, emotional system. And the other is the slow, rational system. Take your time and think it through. Don't make a quick decision about finances."
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As Ariely notes, "We decide on a mortgage too early without truly searching and without negotiating."
Consider the big picture and the big numbers. Shopping annual percentage rates (APRs) rather than just a lender’s published rates, and considering your total costs can help you choose the best mortgage.
And give your mind a little more time to work out the details.
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Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick
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