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16 February 2004
"I have read all your articles about
mortgage brokers and lenders, and I still don�t know which to go to. Can you
convert your generalizations into specific suggestions about who should see a
lender, and who should see a broker?"
If borrowers could shop for home loans as
easily as they can shop for the houses that secure the loans, it wouldn�t
matter whether you dealt with a broker or a lender. You would shop the market
for the best price, and whether the loan provider offering it was a broker or a
lender wouldn�t matter. Because the home loan market is so difficult to shop,
however, the type of loan provider can matter to some borrowers.
The key
difference between brokers and lenders is that brokers offer loan
programs from many different lenders. This means that brokers are more likely to
find a loan that will meet the specialized needs of borrowers than a single
lender.
For example, many
lenders won�t offer loans to borrowers with poor credit, borrowers who can�t
document their income or assets, borrowers who want a mortgage on which the
payment starts low and rises over time, borrowers who can�t make any down
payment, borrowers who want to purchase a condominium as an investment,
borrowers with very high existing debts, borrowers who need to close within 72
hours, or borrowers who reside abroad. The list goes on and on.
But there are
lenders in every one of these niches, and brokers can usually find them when
needed. The implication is that borrowers with special needs such as these can
save much time and effort by patronizing a broker.
Borrowers who fall
into generic market niches that are serviced by all lenders can go either way.
Their decision should be based on whether or not they want to shop the market on
their own, or whether they prefer to retain a broker to shop for them.
If you elect to shop
on your own, you are exposed to all the booby traps that await the unwary in
this market. Here are just a few:
*Loan prices are
reset every day, so you can�t compare A�s price on Monday with B�s on
Tuesday.
*Loan prices
depend on the type of loan, loan features, type of property, purpose of loan,
and more. Unless you specify them all, A may give you the price of a sedan and
B the price of an SUV.
*Loan prices have
at least three price dimensions (interest rate, fees expressed as a percent of
the loan, and fees expressed in dollars). If you don�t take them all into
account, you may not select the lowest overall price.
*Lenders and
brokers do not guarantee prices until they are locked, and some give
"low-ball" quotes to snare the business. If you don�t know how to
avoid phony price quotes, you may be snared.
Those who elect to
shop for themselves should read Steps
in Shopping For a Mortgage. It will guide you on how to deal with these and
other impediments to effective shopping.
If you don�t feel
up to the challenge and would prefer to delegate responsibility to someone else,
go with a mortgage broker. Brokers are experts at shopping the market. They are
far better positioned than consumers to select the best deal available from
competing lenders on the day the terms of the loan are locked.
The problem in
dealing with a broker is that most brokers view themselves as independent
contractors, and as such their interests are not fully aligned with those of
borrowers. The broker�s income on a transaction is the mark- up of the
wholesale price quoted by the lender. The higher the price the broker can induce
the borrower to pay, the larger the markup.
To minimize this
conflict, borrowers should retain brokers as their agents for a fixed fee
negotiated in advance. The fee must include any compensation received from the
lender, since you are paying that fee indirectly in the interest rate. Upfront
Mortgage Brokers, listed on my web site, operate this way as a matter of course,
but others will as well if customers request it. Make sure the fee is in
writing.
Copyright Jack
Guttentag 2004
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