Mortgage brokers can be key players in identifying the best home loan for their clients.
As the conduit between lenders and borrowers, mortgage brokers offer clients multiple options when it comes to choosing a rate and a lender. The broker gets paid by either you or the lender as a percentage of the loan amount, typically in the 1 percent to 2 percent range.
Why use a broker then? Because they may have access to some great rates. For example, United Wholesale Mortgage, which provides loans through brokers, in May began offering interest rates as low as 2.5 percent for 30-year fixed purchase mortgages and refinances. Not only do brokers submit interest rate options to their clients, but they also help navigate the many loan choices, from term to type.
So, whether this is your first mortgage, a refinance or you’re an old pro at this, there are three basic questions every borrower should ask their broker.
1. What is the right type of mortgage for me?
Like cars, every mortgage type will get you to the same place (buying a home), but the ride will be different. Your broker should understand your financial situation before recommending the best type of mortgage for you.
For example, someone who wants to minimize interest and pay down their mortgage faster might be better off in a 15-year mortgage. However, that option is not ideal if you plan on selling the home in a few years. Likewise, someone who has credit challenges or a smaller down payment might do well to explore FHA loans.
These are important details your broker will assess to identify the best mortgage for you.
A good broker will be able to match a mortgage with your short- and long-term goals. If your broker is quick to put you in a loan that doesn’t fit your situation, keep shopping around.
2. How much will my mortgage cost?
A mortgage broker is required to itemize all their fees upfront and not charge any more than the stated amount. Pay close attention to the interest rate of the loan and any other fees and costs charged by the lender. Then compare these figures with the other all-in costs of a mortgage from at least several lenders.
Mortgage brokers are required to provide you with a loan estimate per Consumer Financial Protection Bureau rules.
An estimate requires, at minimum, the following borrower information:
- Social Security number
- Property address
- Loan amount requested
The more information you provide, the more accurate your estimates will be. A loan estimate should include mortgage interest rate, as well as costs of closing, taxes and insurance. It should also include the estimated monthly payment.
Based on the figures you’re given, you can see how that fits into your budget and you can also comparison shop. If the amount is too high, ask your broker about other available options (for example, FHA loans or local first-time homebuyer programs).
3. Should I use buy points or make a larger down payment?
There is no single answer to this question, but your mortgage broker can help you understand the pros and cons of the different options, such as buying points. As a general rule, it’s never a good idea to drain your savings for any purchase, including a house. Most experts agree that folks should save enough to cover between three and six months of emergency expenses. That means you should include your soon-to-be mortgage payment in your emergency-fund calculation.
The more information you give your broker about your goals (do you want to invest your money, start a business, buy a second home) and future plans, the better they can help you strategize how to approach your mortgage.
For example, homebuyers who don’t plan on staying in the home long-term might not want to spend cash on points (which push your interest rate down). Since you won’t have that mortgage for 30 years, the amount you spend on points will likely outweigh what you save on interest.
The same goes for a down payment. Typically, conventional mortgages require private mortgage insurance (PMI) for down payments less than 20 percent of the purchase price. PMI costs somewhere .55 percent to 2.25 percent of the purchase price annually until your equity in the property reaches 20 percent. This means you could pay $100 or more per month extra. However, if putting down 20 percent means using all of your savings, then you might want to explore other options.
There are some lenders that don’t require PMI as well as certain loan types, like VA loans, that don’t have this insurance. Be sure to find out what you qualify for before you get locked into a loan.
Before you choose a mortgage
A mortgage is a long-term commitment, so do your research before you sign a contract. Find out what the average interest rate for the type of mortgage you want is. Rate tables are a great place to start, as they give you a snapshot of what multiple lenders are offering. Bankrate updates their rate tables regularly, so you can check here to get current information.
If your broker is providing estimates that are not in line with the average rate, find out why and what you can do to get the rate you’re after.
When it’s time to select a mortgage broker, make sure that they come with recommendations and have substantial experience. Good brokers will collect important information about your finances as well as your goals before making recommendations, so if a broker pushes you toward a loan without knowing these things, then a red flag should go up.
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