How to Choose a Mortgage Lender
When you shop for a loan provider, you have two options.
- Contact lenders directly.
You can seek out lenders (banks, credit unions, S&Ls, etc.) yourself. This
involves contacting the lender and educating yourself on their
offerings.
- Use a mortgage broker.
This involves hiring someone to act as your agent. The job of
the broker is to canvass the market and identify the options
that best meet your
mortgage goals.
Each approach has advantages and disadvantages. Mortgage brokers
provide advice and guidance, but there is a fee. Working directly
with lenders is free, but you may not get the best deal unless
you are very knowledgeable about the mortgage industry.
Mortgage Abuses
Whether you work with a lender or a broker, you may face some form of mortgage abuse.
In his book,
How to Save Thousands of Dollars on Your Home Mortgage,
Randy Johnson devotes an entire chapter to how mortgage
professionals cheat their customers. This makes
for interesting reading and by itself is worth the price of
the book. If the Johnson book is not handy, review the lesson on
mortgage tricks.
The point is not that lenders or brokers are cheats and liars. Rather,
it is a recognition that some mortgage professionals have
mixed motives. On one hand, they should want to help you get a good
mortgage at a fair price; on the other hand, they are paid by
their employer to make a profit.
One of the advantages of conducting a
preliminary analysis of the
mortgage market
is that you bring some knowledge to the table when you meet with
lenders.
If it seems to you that the person you are dealing
with tries to "push" inappropriate mortgage options,
take your business elsewhere. Remember, you are the boss.
Transparency and Mortgage Loans
Mortgage abuses persist because most lenders do not disclose
mortgage costs, making it difficult for consumers to negotiate a
fair price. The solution: transparency.
Jack Guttentag, a retired finance professor, has identified a group
of lenders and brokers who will disclose a mortgage's actual cost
in writing and in advance. The lenders are called
Upfront Mortgage Lenders, and the brokers are
called Upfront Mortgage Brokers.
You can find a list of Upfront Mortgage Lenders and Upfront Mortgage
Brokers on Guttentag's helpful website:
www.mtgprofessor.com.
Upfront Mortgage Brokers
Here is how to work with an Upfront Mortgage Broker. You contact
the broker
directly and negotiate a fee. The fee averages about 2% of the loan
amount, although it may be lower for a large loan and higher for a
small loan. It may even be affected by your creditworthiness. If
you have excellent credit, your fee may be lower.
In most cases, the fee will be justified by the savings in total
mortgage cost. Upfront Mortgage Brokers secure significantly
lower interest rates than home buyers can typically obtain
from retail lenders. Because everything is transparent,
home buyers are less vulnerable to common mortgage tricks.
And finally, if you share your
mortgage goal with the Upfront Mortgage Broker, he/she can
provide advice on the type of mortgage that will best meet
your goal. Because the broker is familiar with the industry,
he/she may even come up with attractive options that would not
occur to typical home buyers.
Upfront Mortgage Lenders
If you are knowledgeable about the mortgage industry, comfortable with
the internet, and do not require a lot of hand-holding, an Upfront
Mortgage Lender may be an attractive option.
Compared to an Upfront Mortgage Broker, the main advantage of an Upfront
Mortgage Lender is that you pay no broker fee. The main disadvantage
is that you miss out on the advice of an experienced broker - advice
that could save you money.
Compared to a traditional lender, the main advantage of working with
an Upfront Mortgage Lender is transparency - clear
explanations of all costs and fees - and fewer
opportunities for mortgage tricks. Note, however, that Upfront
Mortgage Lenders do not guarantee lower prices or better service
than traditional lenders. You need to check that out for yourself.