Investment Guide
Borrow Smart
Emily Lambert, 05.16.05
Mortgage brokers can save you money by getting better rates. But watch out
for the rip-off artists.
It was like finding out what was inside that sausage you just ate. Only when he
sat at the closing table did the home buyer see that the interest rate he'd accepted
on his $3.5 million loan had been fattened by the fee his mortgage broker had
larded on.
The buyer knew about the broker's 1% fee on the loan amount. But the buyer had
no inkling about the extra 2% finder's payment (called a "lender's rebate" or
"yield spread premium") from the lender to the broker. The broker's $70,000 baksheesh
from the lender got shifted to the mortgage. The ripped-off buyer reluctantly
signed, says Deerfield Beach, Fla. loan broker Elise Altergott, who handled his
refinancing.
Mortgage brokers have a bad rep. "Probably half the people in the business today
are in it because they can screw somebody with impunity," says Gordon Randolph
(Randy) Johnson, a California broker and author of How to Save Thousands of
Dollars on Your Home Mortgage . But to write them all off is a mistake. If
you can find an honest and competent practitioner, you can land a better mortgage
than you'd get on your own.
Although they are sometimes associated with poor credit risks and hard-to-sell
properties, loan brokers can be a big help to people who simply want to save the
time and hassle of scouting out different loan packages. More important, a broker
has access to wholesale interest rates, not just higher retail ones quoted to
borrowers. A broker can shop around more efficiently: Rates change fast; if you
start calling lenders for quotes at 9 a.m., the data could be outdated by day's
end.
Be sure to quiz the broker about how many lenders he canvassed and what each said.
Consult at least five brokers before picking. Here are the steps to get the best
deal:
Insist On Disclosures. You have a right to know the loan and
fee structure at the outset. Documents called rate sheets detail how much your
rate will be if you choose to pay points (an upfront interest fee that reduces
the annual interest rate) or not pay points, and how much in each case the lender's
rebate will be.
These sheets are often labeled with some variation of: "Do not show to the general
public." You might ask to see them anyway, or at least the portion that applies
to you. The broker may refuse or show you data but not the lender's name. "I'm
not going to tell the borrower my source. I don't want him to go around me," says
Catherine Coy, a broker at Harborside Financial Network.
To double-check, a week before closing ask for something called the HUD-1 settlement
statement, which spells out the fees. That document can be hard to decipher, so
also require the broker to furnish an Estimated Closing Statement ahead of time,
with all fees delineated. That should reveal whether the broker bags a hidden
fee over and above the stated base rate. Finally, as extra protection against
rude surprises at the closing table, have the broker send you a confirmation letter
from the lender when you lock in a rate.
Ask For All-Inclusive Quotes. Insist that the broker give you
an all-inclusive interest rate that leaves you with no fees to be paid at closing,
says Susan Woodward, founder of Sand Hill Econometrics and former chief economist
for the Securities & Exchange Commission. You want them to include "every
dime, every piddling little fee," she says. That means transfer taxes, title fees,
credit report fees, appraisal fees.
Get It In Writing. When all the fees are rolled into your interest
rate they will generally add between 0.375 and 0.75 percentage points (on loans
between $100,000 and $200,000). Economist Woodward calculates that you almost
always come out ahead with closing fees tucked into the (now higher) rate. Also,
note that you can deduct mortgage interest, under both the regular and alternative
minimum tax, but not fees, if paid separately.
It helps to know what a typical broker's rake-off is. According to Wholesale Access
Research & Consulting, they charge an average 1.5% for a conventional loan
and 1.3% for a jumbo (over $360,000). You can get other fee info at eloan.com.
Look For Upfront Mortgage Brokers. These are people who are most
amenable to disclosure and prior commitments in writing. With the ebbing of refinancings,
brokers are hungry for clients and thus may be more motivated to be transparent
at the start. A Web site, www.mtgprofessor.com, lists 96 around the nation who
do this. Jack M. Guttentag, the Wharton School professor emeritus who runs the
site, says borrowers who use upfront mortgage brokers correct an informational
disadvantage. Knowing how brokers are paid gives borrowers more negotiating power,
transparency and probably better deals, too. If a lender offers a rebate, it belongs
to the borrower unless otherwise specified.
