Enlisting the help of a mortgage broker can make the home buying process run more smoothly. Brokers connect buyers with lenders so they can secure the most favorable mortgage loan terms possible. While they have a financial incentive to help you, it's important to make sure you're not paying too much. Here are some tips to keep in mind when working with mortgage brokers.
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1. Understand How Mortgage Brokers Are Paid
Mortgage brokers can either be paid by the buyer or the lender. This fee is typically 1% to 2% percent of the loan amount. So for a $250,000 mortgage, the fee would range from $2,500 to $5,000. This fee can either be paid up front or rolled into the home loan.
Having the lender cover the broker's fee may seem like the better option, but there may be a catch. A broker may accept a higher fee from the lender in exchange for negotiating a more expensive mortgage rate. That means you, the buyer, could end up paying more interest over the life of the loan. So shelling out a few thousand dollars for the broker's commission might be worth it.
2. Compare Loan Terms
You can save a lot of time by shopping for a mortgage through a broker. But just because they're doing all the legwork doesn't mean you should accept what they offer at face value. If a mortgage broker is putting their interests ahead of yours, you could be missing out on a better deal elsewhere.
It's a good idea to do your own homework and take the time to evaluate different loan options. If your lender's paying your broker, you'll need to find out whether the yield spread premium would be lower if you took a different mortgage route.
The yield spread premium refers to the commission the lender gives the broker for locking in a higher interest rate. If you're working with a legit broker, they'll give you an honest answer about whether another loan would be cheaper. If the broker tries to dodge the question, you might need to look for another mortgage.
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3. Ask for a Guarantee
Within three days of applying for a loan, you should receive a loan estimate, which details the basics of the mortgage you've applied for. That includes things like the size of the loan, your interest rate and the estimated cost of taxes, insurance and your monthly payment.
If the mortgage terms fit with what you're looking for, you can ask the broker to guarantee the interest rate and the different costs required to close. While they're not obligated to do so, a broker might be willing to assure you that you'll get the terms you're being quoted.
Related Article: What Is a Mortgage Broker?
One of the best ways to avoid a mortgage broker scam is to check them out before you enter into a relationship with them. You can look at their Better Business Bureau rating and check with your state Attorney General's office to see if any complaints have been filed against them.
If nothing turns up, you can scan the web for negative consumer reviews that might shed some light on how a particular broker operates.