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.
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.
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 web site: 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.