With all the news about mortgage lenders struggling and borrowers defaulting, it seems like a good time to review some principles about shopping for a mortgage. If you're looking at an adjustable rate loan that is about to go up or if you've got a "creative mortgage," it may be time to switch to a more basic loan. The world of mortgages is baffling, but here's what matters: who provides your loan, what loan you get and how you manage that loan later.
First of all, know the difference between a mortgage broker and a mortgage lender. Mortgage brokers almost never use the word "broker" in their business names. In fact, they often use names like "XYZ Home Loans," which imply that they make home loans. They don't. Mortgage brokers don't have any money to give you. Zero. Zilch. Nada. They are simply professional shoppers who approach lenders for you. There are millions of mortgage brokers nationwide. They tend to be small, locally based businesses. One caution: if you use a mortgage broker and things go wrong, the broker can blame the lender and the lender will blame the broker. It can be hard to get satisfaction when that happens.
Mortgage lenders are usually giant companies that do business nationwide. Some are full-service banks. Others specialize in mortgages. Some mortgage lenders don't really do business with consumers. They are in the field simply to make home loans, then sell those loans to investors as soon as possible. I prefer mortgage lenders who keep their loans. They have more incentive to be consumer-friendly, since they have long-term relationships with their customers.
If you have tip-top credit and enough cash for a big down payment, I suggest you at least try to shop for loans directly through mortgage lenders. This advice comes from the basic principle that it's best to cut out middlemen whenever possible. Every middleman has to be paid, right? Information is so accessible these days that shopping for interest rates on your own is pretty easy.
Look in the paper. Call the bank where you have your checking account. Go online. I shopped for my mortgage on the Internet, although my trust broke down when it came time to actually apply. For that, I wanted to speak to a live human. On the down side, since mortgage lenders may not deal directly with customers very often, they can be downright klutzy about processing your paperwork. My mortgage lender was clueless. Check out your mortgage lender's reputation before you do a deal.
If your loan-shopping is complicated by a lot of factors, that's when a mortgage broker can really be worth the commission. For example, if you have poor credit, a mortgage broker can scour the financial world to find you a loan you might not be able to find on your own. If you have little cash for your down payment, a mortgage broker can advise you on creative ways to keep your costs down. If interest rates are high across the board, a mortgage broker may have some sound coping strategies. Since brokers do nothing but serve customers, they may be better than lenders at streamlining their requests for paperwork. Be sure to check the broker's reputation. It's not very hard to become a mortgage broker, so you want to be sure you're dealing with a pro.
After you choose your lender or broker, you have to choose what type of loan you want.