Why You Should Shop Around for the Best Interest Rates – Five Minutes to Save $26k

Why You Should Shop Around for the Best Interest Rates – Five Minutes to Save $26k

Interest rates matter. They matter quite a bit. They determine how much a bank pays you to keep your money at their establishment. And they determine how much you pay a bank or company when you take out a loan.

In case you aren’t too familiar with how interest rates work, let me tell you that the interest you receive on a savings account will almost always be less than what you would pay on a loan. This is called a “spread” and it is one of the ways banks make money. It is also why you should shop around for the best interest rates.

How Banks Make Money

Banks will take the money their customers put into savings accounts and loan them out to customers who take out loans. Essentially, part of the interest the bank earns off of the loan is paid to you as interest on your savings. The bigger the difference in these rates (the spread) is, the more profit for the bank.

So, chances are the bank that will give you the best interest rates on savings or a CD (certificate of deposit) will be different from the one that will give you the best interest rate on a car loan or mortgage.

Take the following example (the numbers have been simplified for ease of explaining):

Interest Rate Table Example

If random person Sam owed $100,000 on a mortgage and had $100,000 in savings both at Bank A, Bank A is making 1.9% off of Sam. The mortgage would cost Sam $4,000 a year, but Sam would make $2,100 a year on his savings. So in total, Sam would pay $1,900 that year to Bank A.

Now if you are shopping around (because you are smart), you can choose to take out a mortgage with Bank B at 3.875%, and have your savings with Bank C where you will get 2.5% on your money.

If you have the same amount of mortgage principal and savings as Sam, you will only be paying $1,375 in interest on your mortgage. The $3,875 in actual mortgage interest is partially offset by the $2,500 you would receive in interest on your savings.

Why Having a Mortgage is Not Necessarily a Bad Thing

Of course, by the numbers the best thing you can really do is pay off the mortgage and have no savings. This way you pay no mortgage interest. But what happens if you lose your job? Or your car breaks down? Or if you break your leg skiing and now have huge hospital bills?

I am of the opinion that having a mortgage is not a terrible thing as long as you keep your costs low (i.e. a low interest rate). I’d rather have the peace of mind that I can take a major financial setback in stride instead of being mortgage free. Emergency funds are important.

And it’s not often that someone has the cash to pay off their mortgage just sitting in their savings account. If you are actually in this situation, call a financial advisor or even a discount brokerage company’s 800 number. That cash could be working a lot harder for you.

Back to the Point

If we stick to the example and it’s oversimplified numbers, you are saving almost $600 more than Sam just by doing a little footwork. $600 over a 30-year mortgage is $18,000. That’s six $3,000 vacations/one big vacation every five years.

Here’s a more realistic example (with numbers provided by Bankrate’s mortgage calculator):

Fictitious Bill is under contract on a home that costs $383,500 (the average home price in 2018) and will put 20% down so we won’t have to account for PMI (private mortgage insurance).

Mortgage Interest Rate Example

If Bill went with the average interest rate, he would pay:

$1,847 a month in mortgage payments

-and-

If Bill shopped around a bit and went with Bank D, with everything else equal, he would pay:

$1,773 a month in mortgage payments

-and-

Bill would save $74 a month on mortgage payments that could be saved, used to pay Saving Thousands in Five Mintuesoff credit card, auto, and/or student loan debt, or splurged on an awesome night out on the town each month.

In total, Bill would have saved $26,531.06. That’s a car. By taking a few minutes and shopping around for a better interest rate, Bill basically just got a free car with his house purchase. A new free car. Sans Oprah.

In the End…

Yeah I pretty much feel like that sums it up. I’ve never actually compared those numbers before. A freaking car. And not a beater like I would buy. A nice car, that remembers each drivers’ personal settings.

Of course, keep an eye on extra costs that might be tagged onto a good interest rate: closing costs on loans, account fees on savings accounts, etc. But all else equal, you want one of the lowest rates for loans, and one of the highest rates for savings.

Like I’ve said before, it takes work to lower expenses like a mortgage or any of the other non discretionary expenses. But it can be done, and in the long run it is very beneficial. So shop around. Seriously, five minutes can save you $26k.

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