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Don’t Get Taken Advantage Of By Your Mortgage Broker
By JLP | June 1, 2007
Last week, while I was taking a few days off, I read Mortgage Brokers: Friends or Foes? ($) by James Hagerty of the Wall Street Journal. In a little box beside the article were four questions that EVERY person should ask their mortgage broker BEFORE they sign on the dotted line. The questions:
- What will be your total compensation, from me and the lender, for any loan you help me obtain?
- Will that compensation depend on what type of loan I choose, the interest rate or any prepayment penalties?
- Are you willing to work for a flat fee specified in advance and rebate to me any compensation beyone that level that you get from the lender?
- How many lenders do you work with on a regular basis? Do any of them account for a majority of your business?
In addition to those questions, I have a few other things I would like to add:
1. Before you even go in to talk with a mortgage broker, figure out how much house you can afford. Once you have figured out what your budget will allow and that there are houses to buy in that price range, then go talk to a broker. DO NOT let them try to talk you into spending more than your budgeted amount! This is why the second question from the list above is so important.
2. Find out what your credit score is. The interest rate you are offered will be based on your credit score. The higher your credit score, the lower (and better) the interest rate. The easiest way to get your credit score is to check out myFICO.com (no affiliation). For $45 you can get all 3 credit scores or you can get individual credit scores for around $15 each. Also, when you order your credit score, you also get a copy of your credit report.
3. Once you know your credit score, find out what the current mortgage rates are. You can do that by checking out HSH Associates. They publish average mortgage rates, which will give you a feel for what you can expect and you’ll know whether or not your mortgage broker is trying to take advantage of you. Also, call local banks and see what they have to offer. If you know the average mortgage interest rate for a 30-year fixed mortage is 6.4% and your broker is suggesting an 8% or 9% interest rate, that’s a huge red flag.
The opposite is also true. If the broker is offering rates that are a lot less than average, then it is probably a teaser rate, which will jump to a higher rate at a later time. AVOID THAT AT ALL COSTS!
I am not a fan of adjustable-rate mortgages. Too many people don’t understand them and they can leave you in a volunerable position if interest rates were to increase. That said, if you still want an ARM, make sure you understand the various scenarios that could impact your payment. Ask the broker to show you the worst case scenario. How high “could” your payments go? You need to know this.
4. Use my simple mortgage calculator to estimate what your payments could be given the amount borrowed, term of the loan, and interest rate. Keep in mind that this number WILL NOT include taxes and insurance.
5. Finally, be prepared to walk away. If you get the feeling that the broker isn’t shooting straight with you go somewhere else.
There’s a few suggestions for you. If I missed anything please feel free to mention it in the comments.
Topics: Budgeting, Housing Market, Mortgages |
June 1st, 2007 at 1:43 pm
If you haven’t already gotten your free report within the last 12 months, I recommend getting your score with annualcreditreport.com. You can get it from that site online at no cost and there is an additional option to get your scores at around $8 a piece.
June 1st, 2007 at 2:29 pm
Check out the Mortgage Professor’s Web site at http://www.mtgprofessor.com/ for lots of good stuff, tips and calcs for the consumer. He also started the “Upfront Mortgage Broker” movement which is similar to what fee-only is to financial advisors.
June 1st, 2007 at 2:50 pm
This is all good advice. But I think the most important and very easy thing people need to do is to shop around. And let each person you deal with know that you are shopping around. It is far less likely that you will be offerred a really bad deal when they know they have to compete with other brokers/lenders. Anyone who thinks he got “ripped off” by a broker but never shopped around and compared offers got exactly what he deserved. People who sell things are out to get the best deal they can and will charge you as much as they think they can get away with.
June 1st, 2007 at 2:57 pm
I absolutely agree, Rob. I shopped around for my mortgage lender, and one broker was a point and a half higher than the one I accepted (all other terms the same), yet the broker argued that it was the “best he could do”.
June 1st, 2007 at 3:19 pm
I’m an Upfront Mortgage Broker. The Mortgage Professor’s Upfront Mortgage Brokers now have their own website: http://www.upfrontmortgagebrokers.org/.
Chris shopped around for his mortgage lender while Rob speaks to the need “to shop around”. I have found that when retaining a professional or specialist — doctors, attorneys, roofers, mechanics — that I prefer to shop for the specialist and then let him or her do the job. There is almost nothing a mortgage broker can do for you that you cannot do for yourself with many long hours of studying and shopping. Shopping is the essential part — whether you shop for the service or the service provider seems to be a personal choice.
June 1st, 2007 at 6:23 pm
Jefferson, you mean not to use a broker? That’s great advice. I went through a broker, some online ‘discount’ brokers, and called 2-3 banks directly. I ended up getting a mortgage through one of the banks that I contacted directly.
I don’t think a mortgage broker is necessarily bad, as it was just one other mortgage option (and I was trying to access all my options), but definitely contacting banks directly is a smart plan.
June 2nd, 2007 at 7:54 pm
JLP,
I know it is fun to bash the mortgage industry these days. After all, we just went through a tumultuous time of significant volumes and it seems that every low life on the planet got into the mortgage business.
However I think that you should give some pause before you recommend to your readers what ever you can find on the planet to publish.
You work for UBS and if everyone followed your advice, UBS would not be here tomorrow. I can tell you from experience that my UBS advisor was NOT the best deal on the planet. I used him because I could trust him, he had 8 times more money then I did in the market, and he was always honest with me. He managed money for billionaires so I figures he might now something that I didn’t and I was willing to pay him for it. And trust me…he didn’t get his information from journalists.
If you had a brain tumor, would you be looking for the lowest cost brain surgeon? If you were wrongfully accused of murder, would you be looking for the cheapest attorney?
Come on JLP, I like you but quit following this incessant cry of the masses to constantly find the cheapest.
If you are buying a toaster, then fine…find the cheapest. But when it comes to a trusted adviser, helping you make the most important decisions of your life, how can you advise this approach?
If I called you tomorrow and said that I expected you to match a trade price of $7 per trade what would you say? I would hope not! At UBS you had better learn to be better than the broker at Schwab or you will be out of business.
Just as a $7 dollar per trade would be an insult to you and make a commodity of you, I would ask that you quit advising your loyal readers to go for the cheap in financial services. Going for the cheap in financial services will only bring you ruin AND you will never have a lifelong relationship with someone because the cheapest doesn’t translate well in financial services. Please understand that I am NOT talking about price. Charles Schwab does very well for people who want cheap. But the beaches are littered with people making their own decisions and following the advice of $50,000/year journalists.
You need a mortgage then work hard to find the best darn mortgage broker you can find. Check their references. If they are more expensive, then why would you pay them more. Ask them that! If you don’t like the answer then…run and run fast! I can tell you that over 20 years and 7,000 loans, people did not use me because I was the cheapest. People used me because I listened to their needs, and found the best solutions in the marketplace for them. In fact, I took their “cheapest deals” and put them in my spread sheet and let THEM see how horrible these good deals were.
JLP, you are slapping the face of every professional financial services provider.
You look at any financial service provider… the best and the cheapest NEVER meet. Please quite advising your readers to work with the worst in the financial services industries.
I hope and pray that you will consider this and please take this in the spirit in which it was intended.
June 2nd, 2007 at 8:02 pm
PS Congratulation on your blog! You are an AWESOME blogger dude! 650,000 visits! You rock! Now that my friend is something you should be giving advice on and people will pay you handsomely. Oh…and I don’t recommend that you be the lowest price blog coach. You have viewer count that few bloggers do. You have earned and deserve to be paid for all your hard work and experience. If someone want cheap blog advice, let them hire some one who only has 500 viewers. I bet there is a blog expert out there with only 500 views who has the gall to call himself an expert and he would probably say to you…better get an upfront quote first!
Love you man!
June 5th, 2007 at 12:34 pm
It’s always amazing that so many people have mortgages but do not really understand the process properly or how they might be taken advantage of.
Excellent post and a great eye opener for anyone who hasn’t looked at the details of their potential mortgage lender closely enough.
June 22nd, 2007 at 3:14 am
Great piece of info. Thanks
June 28th, 2007 at 2:13 am
Great article here. The WSJ article you cite is actually a page from the Jack Guttentag’s playbook. A few problems I might like to point out to you:
1- Home equity is a poor investment. It doesn’t pass the test for liquidity, safety, or return. Wealthy people have alwyas used debt, especially tax-advantaged debt to their advantage. Consider, as a financial planner, the benefits of equity segregation for arbtrage (eg- borrow at 4% after-tax and invest for 7% after tax)
2- Jack Guttentag lost a whole bunch of credibility when he advocated government regulation for flat mortgage broker fees. His advice is pr price-fixing and doesn’t account for the value of advice and performance (Kind of the same problem financial planners have)
3- Mortgages are hardly a commodity. ARMs are historically the cheapest mortgage a homeowner can get and offer an excellent opportunity for arbitrage (rates rise, stocks rise).
I try very hard to educate clients about how to use their mortgage as an effective way to increase their wealth. It ain’t always easy, especially with the bad apples in my industry.
Great read!
July 15th, 2007 at 10:08 pm
When you do re-finance, make sure you look for no-cost refinance. Most brokers “cheats” by adding all the fees to the original loan amount and claims they offer “no cost refinance”. Believe it or not, there are real no cost refinance options. That is, your load amount will stay the same, while you rate will go down, and you don’t pay any closing fees whatsoever. I did a series of no cost refinance during 2000-2004 period, and brought my original 10-1 ARM from 7% to the current 15-year fixed at 4.625%. The last refinance happened around 2003 time frame. Like a stock market, it is impossible for anyone to pinpoint the lowest point. So the way to play into it is to lock into lower interest multiple times, using real no cost refinance. This is exactly what I did. I refinanced for about 5 times before I settled for the last and the best rate. At this rate, who wants to pay off the mortgage? The online banking rate is even higher.
November 24th, 2007 at 6:32 pm
Just wanted to make a mention of what is really happening to some of us trying to refinance today. I have a FICO score in the low 700’s with a few mortgage lates. I need to buy out my EX [who didn't mentioned he wasn't making his half of the mortgage payments, hence the lates] the loan is for $300K, I came across a broker who said he could get me a loan. I was thrilled. People around me suggested I request a GFE from him. Not knowing diddley sqwat about how it all works, I was amazed by their reaction to the $22K closing costs he had listed on the GFE. This is what I have to look forward to today in seeking a mortgage broker. All I have to say is “GOD BLESS” The Honest Hard Working Broker cause their isn’t too many of you around. Where ever you are!