Inevitably, during the home-buying process,  buyers are faced with the question of how to actually pay for the new home.  For some, it’s an easy question to answer: just use all those thousands of dollars lying around to go ahead and pay cash for the house.  For those of us not lucky enough to be able to pay cash for a new home, we have to decide whether to go with a bank or credit union, or… to turn to the dark side, and go with a mortgage broker. 

After having our offer accepted on the new house, we set out to find the best financing deal.  I used a mortgage broker when purchasing my first place, and I wasn’t entirely convinced I had gotten the best deal possible.  Sure, I hadn’t put down 20% on the house - it just wasn’t feasible as I was still in school and had very little money to work with.  Still, it seemed like I could have done better than 6.5% on a 30-year loan.  So I went into this particular transaction a wee bit more cautiously.  I took it upon myself to do some research and found any number of posts by people who have had bad experiences with mortgage brokers.  They each recommended never again dealing with a broker; their basic advice was “go straight to a credit union, they’re much more trustworthy”.  The major issues with mortgage brokers:

• Brokers are typically paid by the banks.  Here’s your standard conflict of interest argument.  The broker is supposedly working for you, trying to get you the best rate possible.  But… in most cases, the broker is paid by the bank.  If one bank is willing to give a 10% cut (ok, that’s a bit excessive, but I’m just trying to make a point) while another only gives the broker 0.5%, which bank do you think the broker is going to try to convince you to go with?  Lately Upfront Mortgage Brokers are becoming much more popular for just this reason.  Instead of being paid by the bank, an upfront broker is paid a fee by the customer.
• Yield Spread Premium: This is a “bonus” paid to the mortgage broker for convincing a client to accept a rate higher than they qualify for.  Brokers are required to disclose this fee, but many home buyers don’t realize exactly what it is and therefore don’t understand that they can get a better rate.
• Sneaky fees may be added to the closing costs.  Even though it’s not ethical or even legal, mortgage lenders have been known to add certain fees in multiple times.  This usually happens more so when you go with a mortgage broker, and you are more critical of the process and continue to watch what’s going on.  The broker is banking on the fact that you get the HUD-1 form only a day before closing and you don’t have the time or energy to go over each line item with a fine-tooth comb.

That all said, I was leary of going with a mortgage broker again.  If we did decide to go the broker route, I was going to pay very close attention to what exactly what happening with the housing market and the closing costs.

I contacted the broker I had worked with for my first home purchase, and - wonder of wonders - he was thrilled to hear from me!  I met with him, and got a Good Faith Estimate.  Everything seemed to be reasonable, but I was still unsure.  So I checked with the local banks and credit unions.  The rate offered by the broker was very close to the lowest rate I could find at the time, which was offered by a credit union.  When it all came down to making a decision about which way to go, I decided on the mortgage broker.  Here’s why:

• As a return customer, he waived the initial fees.  This could be something I’ll end up paying for on the day of closing, but for now, it means I’ve got a few hundred dollars “extra” in my pocket.
• If the rate decreases, we switch to a new bank (free of charge) and get that new, LOWER rate.  This was the main deciding factor.  When we initially locked in, the rate was set at 6.375% with 20% down.  That same day, the credit union was offering 6.25%.  I took a chance and guessed that the market is pretty bad off right now, and the rates should be dropping.  Had I locked in with the credit union, I would have been stuck with 6.25% - unless I wanted to pay another $400 to lock in the new rate. 

At this point, going with the mortgage broker appears to have been the right way to go.  I got a call not too long ago from him saying that the rates had dropped quite a bit.  We were able to lock in 5.75% on a 30-year loan!  I’ll report back on the closing cost issues in a couple weeks…