Ask the Readers: How Do You Choose a Mortgage Broker?
Published on - May 15th, 2009 (Modified on - December 31st, 2009) (by J.D. Roth) For most of us, buying a home is the largest purchase we’ll ever make. There can be a lot of pressure to get things just right; you don’t want to pay more than you have to. A good broker or lender can help — but how do you find a good broker or lender? That’s what Erin wants to know:
My husband and I are in the market for a house as first-time homebuyers. We’ve done our research about the process of obtaining financing, and all the advice says to shop around for a mortgage. But how do you go about finding lenders or brokers to compare?
Web searches turn up hundreds of lenders and brokers in our major metro area, but I haven’t found a good consumer resource for evaluating them on things like customer service and borrower experience. Our realtor has a list of brokers that his clients have recommended, but it’s not a long enough list to really shop around with. We would generally prefer to have a mortgage through a local institution if possible and if it makes sense compared to other options.
What’s the best way to do this?
One way to research mortgage rates is through sites like Shoprate and Money Rates. These resources can help you locate great mortgage rates from around the country, including most major metropolitan areas.
But perhaps the best way to find a good broker is to seek recommendations from family and friends. Obtaining a mortgage isn’t just about finding the best interest rate (thought that’s probably the most important factor). You also want to find somebody you can work with and trust. Personal recommendations can offer color and nuance that you just can’t find from a website.
When I shop for mortgages, these three factors are most important to me:
- Good rates. Many first-time homebuyers don’t realize that even a small change in interest rates can make an enormous difference in the monthly mortgage payment — and, especially, the total cost over the life of the loan. A great mortgage rate should be the top factor when choosing a lender, but it’s not the only factor.
- Low fees. It’s also important to consider what sorts of fees each lender charges. These, too, can have a significant impact on the cost of a mortgage, but I’ve found that many people ignore them. (Probably because the cost of the mortgage is so large that people don’t bother to question charges that seem so small in comparison.) Be sure to get a good-faith estimate whenever a lender or broker provides a quote.
- Gut feeling. You should always trust your gut. If the broker seems shady, find someone else. It’s great to have somebody you enjoy working with, somebody who seems like a member of your “team”, somebody you trust.
You may have other specifications, for example if you are looking for low down payment fha loans, you’ll need to find out whether your particular broker is FHA and HUD approved to offer these types of mortgages.
When Kris and I bought our first home in 1994, we found our broker at random through the phone book. We didn’t bother to shop around. In 1998, we refinanced our home after finding a lender on the still-young World Wide Web. We chose the company because they had the best mortgage rates. When we bought our current home in 2004, we asked friends for recommendations, and ended up using a local broker who worked hard for us.
What about you? If you own a home, how did you choose your mortgage broker? Did you shop around? If so, were you just looking for the best rate? Or did you base your decision on other factors, too? If you were shopping for a new mortgage today, how would you choose a broker or lender?
This article is about Ask the Readers, Choices, House and Home
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Great Article! Its extremely important to consult with an independent advisor because as we all know, what’s good for the bank may not necessarily be good for you.
Getting a good rate is important but you also want to get the right size loan with terms that now and in the FUTURE are well suited to your income levels.
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“Relationships mean nothing” is spot on!
When my son and I decided to copurchase a house in what we regarded as a promising neighborhood, I went with the broker who sold me the mortgage on my home (since paid off), because she got a good deal for me and was straightforward and easy to work with. That broker was introduced to me by the Realtor who had found my first house.
I can’t say she got a bad deal for us on the second house. But to get us out of PMI she worked one of those double-mortgage deals, which overall jacked the interest up quite a bit. Then I took out a small equity loan against my own house; I was told the highest its variable rate could go was 12 percent. That was too high for my taste to start with…but then when I called the bank that had the loan to ask after something else, Iearned the rate could go as high as 21 percent! This was not altogether clear in the reams of fine print, but ten or fifteen minutes of digging revealed the guy was right. So much for that “relationship”!
Sooo…. I trotted to the credit union and refinanced that equity loan to a 30-year fixed-rate instrument at a much lower payment (just paid it off yesterday!), and as soon as mortgage rates went down, we refinanced the other house with the credit union, getting rid of the second mortgage and realizing a $300/month saving on the payments.
Next time, I definitely will look around at what lenders are offering, call a bunch of them, and check with the credit union, too.
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Hi
I found a broker through an internet search and was very happy with the service. I have now used him to get 2 mortgages. Many brokers will have access to the same information so it is then a question of customer service.
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Erin,
The advice that JD is providing is sound and I suggest you heed it. I
I may add some addition question that you may want to ask before you proceed – “Why make use of a Mortgage Broker at all?
Well as with most financial matters the answer is “it depends on the circumstances”.
If you want to make use of a broker, make sure that you can get a better deal by doing this than going directly to your bank.
When choosing a broker, one of the best criteria to use is to check that he/she is a member in good standing of the state association of mortgage brokers. The association of mortgage brokers normally enforces code a strict code of ethics and professional practices on their members. It is also required of members to frequently attend mortgage seminars to ensure that they are up to date with the latest issues on mortgage and the associated market conditions. Another important aspect to ensure if you are planning to make use of a mortgage brokers is to use a full time professional, that the broker has a good working knowledge of your type of loan and the broker is capable of representing your interests sufficiently. One key are that I always focus on is to ensure that the broker has a similar value system that I have. This will help to prevent disagreements between you when decisions need to be made by the broker.
JD alluded to the risk of changing interest rates. Well I trust that a competent broker will do a sensitivity analysis and let you have a breakdown of the individual items making up the monthly payments and how changes in these can impact on you. You should know how sensitive your cash flow is for a 0.5%, 1% and say 3% increase in the interest rate and whether or not you will still be able to afford the payments should these changes occur. If the commission is linked to the monthly installments make sure that you understand the impact of this as well. If there is a change in the tax regime concerning housing bonds how and when will this start affecting the affordability of the mortgage? These are just some of the questions that your broker should be able to answer.
If you have been dealing with your bank for a number of years it may be a good idea to get a direct quote from them first. If it does not turn out to be a good quote later on, it will at least give you an idea of what you can personally negotiate. And yes I do mean negotiate. Do not just accept the first quote, ask the bank to give you a better deal and if they don’t then go to another bank.
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This is perhaps the hardest thing to explain to people, but I will try. Interest rates change daily, sometimes up to 4 times in a single day if the bond market is moving fast. On top of that banks, S & Ls, and Credit Unions are not required to tell you how much they are making on the loan while a mortgage broker in most states is required to disclose this. There are at least 3 sections that can be manipulated to hide the true expenses. Finally, APR as a guide does little to illuminate the expenses inside the loan. Originators manipulate the interest rate they give you and are paid money from the lenders for originating a loan over the par rate. All this adds up to making it impossible to really compare loans. The mortgage business is really the worst at hiding true costs of all the financial services.
Where does this leave the consumer. Forget about the ability to get the lowest rate, you can’t get it. But what you need to do is either by references or by prior experience choose someone you are comfortable with or go to a broker and negotiate the total expenses up front. Then the broker can go out and find you the best loan. Make sure this broker shows you the total amount s/he is making on the loan at time of lock to keep them to their word. Generally, depending upon size of loan you should be able to make a deal for 1-2% total compensation to the broker. FHA loans costs are fixed with 2% going to the broker or bank. If you go this way you can get par interest rate loan and pay the broker an origination fee and really get the lowest rate possible. A reputable broker will welcome this way of doing business because they will be happy making their commission and you will get a lower interest rate that will save you thousands of dollars over the next 5-10 years.
Also a knowledgeable mortgage broker can help you structure the loan in a way that is best for your current financial situation.
Finally here is the truth on overall costs. The banks are the most expensive loans, credit unions are next, and mortgage brokers generally get you the best deals if you find an honest one.
By the way I have originated loans here in Florida for 5 years and only work with folks who want up front pricing. Doing business this way connects well with the rest of my financial service business since it engenders mutual trust. You should try it this way!
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My first mortgage, my real estate broker referred me to her. She worked with her, but what drew me to her was that she did no sub-primes, and that she worked with many first time homebuyers. The next experiences were through word of mouth. I went with someone that close friends, co-workers, and acquaintences had used. An added bonus what she too did no sub-primes. Luckily for me, both times my brokers had my interests in mind as opposed to the companies bottom lines.
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I found my broker based on recommendations from coworkers and friends. They in fact only work on referral basis – no ads, and worked very hard to make me a happy “life-customer”. I’ve since returned for a refinance a few years later and would again recommend them to anyone. I think the gut check is always important, as is doing a bit of research beforehand to make sure you’re an informed consumer.
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Great article by JD because he points out the positives and negatives to look for. A few points that I noticed based upon the comments
* I agree “someone should not be afraid to change brokers” – but to take advantage of this advice one must limit the upfront cost. If you give you a credit card and pay $400 for an appraisal and $300 for an application fee, it’s hard to make a move.
* Regardless of what any bank tells you, they can sell your mortgage, retain the servicing rights and you would probably have no idea
* “Get educated” — couldn’t agree more!
* “Relationships don’t matter” — come back and tell me that after your closing costs come in twice as much, the rate isn’t locked properly, you have title issues post closing, or can’t get ahold of the mortgage professional when it matter. Relationships are more critical than any component of a mortgage.
* I am amazed that nobody mentioned the relationship of the mortgage professional to the companies he/she works with. Making sure the professional associates with reputatable, competitent attorneys, appraisers, etc. is probably 2nd most important on the list of priorities, 2nd only to working relationship with the mortgage professional.
Six months ago we made the decision to cut out 90% of our advertising and work strictly on word of mouth and referrals from existing clients. We’ve had more success than we possibly could have imagined. I understand everyone has a different experience when it comes to mortgages, but don’t believe everything you see, hear or read. Most of it is propaganda. Make it a great day!
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