Chances are that when you are ready to buy a home, you will need to obtain a mortgage and that you will utilize the services of a mortgage broker.  Unfortunately, most folks are woefully under prepared and/or misinformed about what a broker does and how to obtain the best loan.  So here are a few nuggets of knowledge from someone in the industry.

1.  Mortgage brokers are professionals.  They close dozens if not hundreds of loans each year.  The average homeowner completes a single mortgage transaction every seven years.  Accordingly, even if you have been buying and selling real estate for years, you should still consider the opinions of your mortgage broker.  It is very very difficult to compare loans objectively, and you should be able to enlist the help of your mortgage broker to make a good decision.  (What else are you paying him or her for?)  If you have any doubt about their recommendations, ask them how the recommendation they are making would affect their commission.  In most cases, brokers earn the same regardless of loan program…so forget the notion that evil mortgage brokers are out there pushing adjustable rate mortgages to pad their paycheck.  If you are uncomfortable, ask and he or she should share that information with you.

2.  Mortgage brokers should be flexible.  They want your business, especially now that the housing market isn’t everything it used to be.  In most cases, brokers offer their products (in terms of interest rate and closing costs) at what they believe to be fair market pricing, but that isn’t always their bottom line.  Ask them if they can do better for you, or show them a better quote from a competitor.  More often than not you will end up paying less for your mortgage. 

3. You should negotiate!  Many people are uncomfortable with the idea of negotiating for a loan.  Simply put, there is nothing wrong with negotiating for a better rate or lower closing costs!  If a mortgage broker leads you to believe that you are out of line or being unethical for negotiating, I would report that broker to the local BBB.

You can draw a parallel to automobile shopping. A savvy shopper would never walk into three auto dealers selling similar cars, compare the stickers, and pay full price for the cheapest…so why would you do that with your mortgage?

Furthermore, the mortgage broker who provides you with a slightly higher estimate at first blush is not trying to cheat you.  Unlike some markets, competition between mortgage brokers is not transparent. In other words, Broker A generally does not know exactly what Broker B is offering.  So while Broker A may initially quote you a bit higher, if you provide Broker A with a Good Faith Estimate from Broker B that shows a better deal, Broker A will in all likelihood cut his/her commission down to beat the competition.  You end up with a better deal.  You win.

The lesson here is to seek quotes (Good Faith Estimates) from several brokers.  Take the best Good Faith Estimate and share it with the other brokers, who should then work to beat one another on rate and/or closing costs.  The competition is healthy for the industry and leaves you with a better rate and/or lower closing costs.

4.  Points are not inherently evil.  Many people (who may or may not even understand what ‘points’ are) decide before even shopping for a loan that they do not want to pay any points.  In the next breath, that same person will tell their broker that they want a 30-year fixed mortgage because they do not plan to refinance. 

If you plan to hold your mortgage for some time, paying points may well save you money.  Consider a $200,000 loan, where one point costs $2,000 (and may be deductible from your income taxes).  Paying one point on this loan will reduce your interest rate by 0.25%, resulting in a savings of $33 per month.  Invested to keep pace with inflation at 3%, that $33 per month adds up to more than $2000 in under six years.  So it may make sense to pay that point if you intend to stay in that mortgage for six years or more.  Most of the time, paying points is unnecessary, but they are not inherently evil.

Note also that when you pay points, it should not increase the broker’s compensation…just reduce your interest rate. 

5.  Last but not least, mortgage brokers provide a service.  When hiring a broker, please remember that you are in fact hiring a broker and not just “buying” a loan from him or her.  In many cases, a knowledgeable, local mortgage broker with financial planning experience is worth a premium over an out-of-state internet lender with dubious experience.  Find someone who will sit across the table from you at closing, and who can advise you wisely on your largest liability.

While these thoughts may fly in the face of your parents’ or grandparents’ advice, trust me.  By keeping the above points in mind when shopping for a mortgage, you WILL save money either in the form of a lower interest rate, lower closing costs, or even both.