A mortgage broker is a licensed professional who negotiates loan agreements between borrowers and lenders. You can use a broker to obtain a purchase mortgage or a refinancing. You can often get lower-than-normal interest rates if you refinance with the help of a broker. On the other hand, the broker's involvement could actually add to your out-of-pocket costs.
Underwriting guidelines, profit targets and cash-flow levels vary from bank to bank. All of these factors have an influence on mortgage rates, so interest rates can vary dramatically from one institution to the next. In order to purchase or refinance a home, you must provide a lender with your tax returns, bank statements and other personal information. The application process is often lengthy and it is even more time-consuming if you shop around for rates. If you work with a broker, you simply provide all your information to that individual. The broker then does the legwork and scours the nation for the best rates. You may end up finding the best deal at a bank that you never would have come across without the help of a broker.
Mortgage contracts are complex. Some banks offer reduced interest rates but offset that by increasing the closing costs. Other banks offer teaser rates that regularly reset during the course of the loan. Early payoff penalties and processing fees can add to the total cost. The average consumer may find it difficult to compare contracts that include so many different stipulations and options. As a lending professional, a broker has the expertise to compare these offerings and locate the best deal.
Brokers earn commissions on mortgages; these fees usually amount to at least 1 percent to 2 percent of the loan amount. You may also have to pay a fee when the loan books. Rather than billing borrowers directly, brokers can also bill the lender. However, lenders often offset this cost by raising the interest rate or hiking closing costs. Directly or indirectly, the borrower usually ends up paying for the broker. If you obtain the same loan by dealing directly with a lender, then you cut out the middleman and save some money. Additionally, some banks offer incentives such as reduced rates to existing customers.
On a standard home loan, you can refinance only if you have equity in your home. However, the federally backed Making Home Affordable Program and various other similar schemes are designed to help homeowners with negative home equity. In many instances, you can refinance your loan even if your loan balance exceeds your home's current value. However, few lenders want to take on such loans. Therefore, you can typically refinance only with your existing lender since both parties have an interest in ensuring you can pay off that debt. Consequently, there is no benefit to adding a broker into the equation.
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