Should You Use a Mortgage Broker?

One of the questions that pops up when buying a home or refinancing a mortgage is should you use a mortgage broker? A broker can help you find a good deal on home loan and simplify the process of shopping for a mortgage, but often at a higher cost than if you'd obtained the loan yourself. So what to do?

The main advantage in using a broker is that a broker knows the mortgage industry and can sift through dozens of lenders to find you the best rate and terms. You could do this yourself, but only with a significant investment of time and still might miss some of the smaller, more obscure lenders that might be best suited to your needs.

The downside of using a broker is that he or she may not be looking out for your best interests. Brokers are independent contractors and are not regulated or licensed in all states. Brokers have been criticized in some instances for steering borrowers into more costly or complex loans that paid them more, but weren't necessarily the best product for the borrower.

In fact, some lenders are reluctant to work with mortgage brokers these days, because many of the high-risk loans that are currently defaulting originated with brokers. However, many of the more exotic and nonstandard loans that some brokers pushed to increase their commissions have practically disappeared. And in a tight credit market like we have today, a reputable broker might be in the best position to find you a loan that is both affordable and meets your needs.

Brokers can be helpful with hard-to-get loans

A broker can often be helpful for borrowers with damaged credit or limited financial resources. They may know of and have access to specialty lenders who deal with customers in those circumstances, or with out-of-state lenders who can provide terms local lenders can't match. They can also be helpful for busy customers who can't spare the time to do an extensive search for the best mortgage terms and are willing to pay a premium for someone to do it for them.

If you have good credit and time to do your own research, you can probably save money by finding and contacting a lender directly - after all, a broker is essentially a middleman who gets paid for his or her services. This is usually in the form of slightly higher interest rate, out of which the broker is paid. However, in some cases you may actually pay less because the broker gets a discount on loans he or she brings to the lender.

When dealing with a broker, be wary of the assertion that they're "paid by the bank." Many borrowers assume this means the broker's services won't cost them anything. What they don't realize is that they may be paying a higher interest rate or fees than the bank would charge other customers, out of which comes the broker's fee.

Look out for added points

Also, when dealing with a broker or with any lender directly, don't focus solely on the interest rate. Some brokers, and lenders too, will use a low rate to entice a borrower, then try to make up the difference by tacking on as many as three to six points onto the loan. When a mortgage runs into the hundreds of thousands of dollars, the additional expense represented by points, each of which equal one percent of the loan amount, can seem like a minor expense. The fact is, each additional point equals about one-eighth of a percent on the interest rate in terms of a borrower's ultimate costs.

It doesn't hurt to use a broker to find out what kind of kind of terms they can get for you -- they don't get paid until the loan is closed, so there's no commitment on your part. See how a broker compares to individual lenders and other brokers, then proceed from there. If you take out or refinance multiple mortgages over the course of your life, you'll probably find that sometimes it pays to use a broker, other times it doesn't - it all depends on the particular circumstances of the loan you're trying to get. But you won't know unless you shop around.