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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127680  
Subject: Re: What/who is a mortgage broker? Date: 5/17/2001 2:53 AM
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Hi xraymd!

I hope Dave will chime in on this question.

Here I come to save the dayyyyyyyy!!!!

I am just starting in the market for a house and have not encountered a "mortgage broker" before following this board. What are the advantages/disadvantages of working with a mortgage broker (honesty encouraged!).

You asked for the right guy!

When I bought my prior house in 1983 the interest rates were scary (in the 12-14% range for fixed, IIRC).

STOP! HOLD THE PRESSES!!!

Did everyone read that correctly? Read it AGAIN!

When I bought my prior house in 1983 the interest rates were scary (in the 12-14% range for fixed, IIRC).

Those who continue to hang on to dreams of refinancing below the current best rates of 6 7/8%-ish... heed this warning. The pendulum ALWAYS swing eventually, and we've been low so long it's MUCH more likely to see future rises than further drops!!!

I really am starting from ground zero and would love some education on what a mortgage broker could do for me that a local lender couldn't or wouldn't.

Well... to start off with let's make a HUGE leap with several assumptions about all parties in comparison;
1) Honesty,
2) Integrity,
3) Experience,
4) Competitiveness,
5) Reponsiveness,
6) Accessibility

NOW... given these could all apply to the dream broker versus the dream local banker or credit unionist... the remaining differences are that;

Broker's Favor;
A) Brokers have more access to more lenders with more loan programs,
B) Brokers access wholesale lenders with rates the bankers and credit unionist don't have access to,
C) Brokers have the ability to shop 3rd party service providers for best rates and services... where local organizations usually have behind-the-back-scratch arrangements and agreements that eliminate competitive effects. Competition in price AND service quality is always in the consumer's advantage.
D) Brokers typically have greater flexibility in the structuring of the terms and fees... so can custom fit a best program to your personal scenario more effectively. Remember; A man with only a hammer treats everything like a nail... and a man with only a screwdriver will be out with only one intention!
E) Brokers usually have no particular loyalty to specific wholesale lenders... it's a free market baby, and the lender who helps the broker win more consumer business with better rates and service is the lender that wins!

Broker's Disfavor;
F) Usually minimal offices and overhead... much more likely to do business on the phone or at your home or office.
G) Often smaller operations... the best are very rarely cookie-cutter or franchise operations. Think of geurilla warfare... brokers are geurilla financiers.
H) Often tough to find... they don't typically spend much on advertising or give-away toasters... usually found via referrals, or MAYBE the yellow pages if they splurge.

Local Banker's Favor;
A) They live in your neighborhood, send their kids to your school, and trade brownie recipes at the local PTA meetings,
B) They have a nicely done office where you can visit the expenditures of your fees,
C) They have a huge institution's brand recognition and reputation to persuade you with,

Local Banker's Disfavor;
D) Usually they're salaried... so they don't especially care if it happens today or tomorrow... or at all.
E) Usually severely restricted to loan programs offered exclusively at their institution. (It's a little known secret that brokers get TONS of referral business from bankers they schmooze for the borrowers that don't fit the bank's loans.)
F) YOU are the one paying for the high-ceilings and marble pillars.

Credit Unionist's Favor;
A) They can supplement their closing costs from your dues,
B) Usually less ostentatious office space than the banks, but not as spartan as the brokers,
C) Else, same as local bank.

Credit Unionist's Disfavor;
D) Closely restricted to their own programs,
E) Virtually never to combo loans to avoid PMI,


Some additional things I would love to know:
I. What does it take to qualify for an 80/20 combo loan - is eligibility income-dependent? Loan size-dependent? Credit rating-dependent?


It comes down to the acronym I.C.E.
Income,
Credit,
Equity (or Assets. But ICA is a dumb acronym!)

How yours balances out determines what programs you qualify for. Given the incredibly competitive financial markets, and what you've described about your scenario, I'd be willing to bet you qualify for a high LTV (loan-to-value) loan if you wanted one.

II. Which is the cheapest loan - 80/10/10 vs 80/15/5 vs 80/20? (Cheapest overall interest rate.)

Think hard and I'd bet you could guess this answer...

Clue; which has more risk to the lenders? Whichless risk?

That's right!
80-10-10 is cheapest,
the higher CLTV (combined loan to value) the two loans, the higher the interest rate on the 2nd mortgage or HELOC (Home Equity Line Of Credit.)
80-20 is the most expensive overall blended interest rate... though it's still usually cheaper on a monthly basis than a similar singly loan with PMI... sometimes even if you put 5% down!

III. In this era of low-interest fixed loans does it make any sense at all to go for an ARM? At what terms?

Well... you know in these days of low cost apples, if you're baking a pumpkin pie would it make sense to buy apples?

Of course ARMS make sense today as in any other era.

ARMs are loans with a timeframe customized for the expected length of use of the loan! If you expect to stay in your loan for 5 years, give or take 1, the best loan Fiinancially and Foolishly would be a variant of the 5/1 ARM! You would save anywhere from 1/2% to 1 1/2% on the interest rate... and when isn't THAT intelligent?!?!?!!!!

IV. What kind of a fee does a mortgage broker charge and how does he/she make his/her money? Commission on loan amount similar to the realtor's commission on the home sale price?

Don't get me started on the differences between loan origination compensation versus realtors levels of compensation...

Liz and I might never speak to each other again (I forget... are we speaking now?)

Mortgage brokers get paid from one or both of 2 sources;
1) the borrower,
2) the lender.

As for that matter, that's where the money comes from to pay any lending organization. Everyone is fighting for the same business on the same competitive battlegrounds... so the often-voiced banker's arguments about them being cheaper because of not charging originations is obviously hogwash. If anyone can get away with making more money, I guarantee they will... every single day of the week!

In General, you won't get a better financial deal from any party than you will from an excellent loan broker who's straightforward, honest, and experienced.

In general, you won't get the attention of a good loan officer unless there's at least $1,500 in it for them (from SOMEWHERE.)

(This is where I know I'll lose folks... especially those who desperately want to hold on to the dream of tricking the professionals or getting something for nothing. Let there forever be one thing clear; You'll ALWAYS end up with the quality you bargained for... one way or t'other!)

No matter what you do, and whoever you finance with... the straight costs will be about the same (assuming you don't get completely blindly screwed by being ignorant of the process.) The bottom line differences will be WHERE those costs are hidden or disclosed, and how well your served by program choice and structure.

Go back to those assumptions above... THOSE are the priorities, regardless of which building or title your professional uses. I'd pick an honest banker over a sleazy broker every day... and there are certaily plenty of all flavors in every organization.

Quality usually has references, though, so don't be sloppy... do your diligence and call or email the references. Don't just accept written testimonials on pretty websites or brochures.

I'm sure I will have more questions but anticipating the forthcoming answers! By the way, I tried to do a search for some of these topics on this board and came up empty-handed so if there is a specific post number I should peruse, please indicate

If you searched and came up dry, ask away! Don't be shy if someone barks once in awhile about common questions. Good for you for searching!!

If the above was helpful, snap "recommend."

Keep it coming!
Dave Donhoff
Lic. Mortgage Broker
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