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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 |