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Should You Use A Mortgage Broker?

By Penny Doherty

Mortgage brokers -- intermediaries who work with networks of lenders to help prospective home buyers get the best mortgage deal -- have been around for more than 30 years. But over the past decade they've gotten involved in over half of the transactions in the $2.7 billion U.S. home-mortgage market.

Do you need one? Why not go directly to a bank? That depends, say new homeowners -- and even mortgage brokers and bankers.

There are pros and cons to both lending sources. The advantage to working with banks is that they lend directly to consumers, while brokers act as middlemen. Sometimes banks will pick up the tab for the mortgage fees, which brokers will always charge because that's how they get paid. Brokers, on the other hand, say that they can help borrowers by tapping a broader variety of lending sources.

Testing the Waters

Since a broker is paid only when a loan is originated, it costs a consumer nothing to work with one for research purposes. For borrowers with less-than-perfect credit or low income, a broker may be able to access loans from out-of-state or specialty lenders that, even if they include additional closing costs will still beat a bank's offer. For conventional borrowers -for instance, homeowners seeking a refinancing-- broker sources could beat bank rates.

Of course, regardless of the source of loan, mortgage lenders say that home buyers capable of making a large cash down payment (20% or more) on their purchase will have more options than those who plan to sink less (5% or lower) into its cost. Similarly, those with solid credit scores (in the 620 to 650 range or higher) will have better choices than buyers with lower numbers.

Research, Research, Research

Most buyers get referrals to mortgage bankers and brokers through realtors, who typically give buyers multiple names and let them do the research. Brokers and banks alike expect that mortgage seekers are comparing rates. Some customers even work with multiple brokers to find out which can locate the best deal from their network of lenders.

Eric and Elise Davis, a 30-something Seattle couple, now have two mortgages -- one on the two-bedroom condo they bought in 1998 and another on a five-acre tract of land they purchased in March as the site for an eventual vacation home. When it came to their condo purchase, a broker couldn't beat their lender's offer -- but in the latter case, they used two brokers before finding a loan from Washington Mutual that was available via a broker but not directly to consumers.

When the Davises bought their 1,300-square-foot condo, they consulted a mortgage broker as well as Seattle Mortgage Co., a lender that their condo developer recommended. Both the broker and the lender could offer the Davises conventional 30-year loans with a 7.25% interest rate. (The Davises refinanced last year at 6.5%.) But Seattle Mortgage gave buyers in their building a $2,500 refund on closing costs. "The broker couldn't find a bank willing to eat 75% of the closing costs," Ms. Davis says.

The experience didn't turn the Davises against brokers, though. When the couple decided to buy five acres of land near Port Angeles, Wash., they sought a 20-year fixed-rate mortgage -- typical for a land purchase. They got quotes from online lenders, talked to mortgage brokers, and also contacted their bank, Bank of America.

Bank of America didn't offer compelling deals, and the online brokerages demanded too much personal information before giving a quote.

Their first mortgage broker, located on the Olympic Peninsula where their property is, could only offer loans with rates in the 7.5%-to-8% ballpark -- a scenario the Davises attribute to the broker's particular network of lending sources. But their second broker, located closer to Seattle in Bellevue, Wash., secured them a loan from Washington Mutual at 6 1/3%. "In one instance, the bank was great for us. In another, brokers were good," Ms. Davis says. "At some point, though, you have to stop looking."

Shopping Around

Of course, sometimes a broker's special deals just won't appeal to a mortgage seeker. Julie Berman, a 28-year-old writing professor in New York, just found a starter one-bedroom that fit her $200,000 to $225,000 price range. While homeowner friends in New York and Chicago advised her to try a mortgage broker -- especially because Ms. Berman's income level might require a guarantor -- ultimately she chose to pursue a mortgage from Chase Manhattan Bank, which has financed other owners in the building where she's buying.

As of late April, Ms. Berman was finalizing her loan and hadn't locked in a rate. But both her broker and Chase quoted similar rates on a 30-year fixed-rate mortgage and she expects to get a loan at about a 6% interest rate. The broker did offer her some lower-interest loans, but Ms. Berman said they didn't appeal to her because they were adjustable rather than fixed-rate mortgages.

Ms. Berman says her broker recommended five-year and seven-year adjustable-rate mortgage plans with initial interest rates of 4% to 5%. To Ms. Berman, those offers looked like good deals for a buyer who planned to sell the property within a few years, but that's not what she wants to do. "Rates are so low now that this didn't seem worth it. I felt like a fixed rate would be easiest," Ms. Berman says.

Other Options Available

Aside from interest rates, brokers can offer other useful perks to mortgage seekers, says Armand Cosenza, president of the National Association of Mortgage Brokers (NAMB). For instance, a broker might help a buyer secure a low-interest credit line alongside the loan, says Mr. Cosenza, who is also partner in mortgage-brokerage Commercial Financial Services Inc. in Richmond Heights, Ohio, which handles clients in Ohio, Indiana, and Pennsylvania. With refinancing, brokers may help clients not only lock in a lower rate but also shorten their loan term. In this instance, monthly payments might go up nominally, but borrowers will pay less over the life of the loan. "Everyone asks, 'What's your interest rate?'" says Mr. Cosenz. "When you talk to a broker, get options," he says.

Closer to Home

Brokers are also increasingly doing business in rural areas of the country, often because large banks find it easier to deal with customers via brokerages than to staff brick-and-mortar retail sites and handle them on their own. In Vermont, nonbank mortgages have grown to 65% of all loans in 2001 from 5% in 1985, says Mark Stanton, president of Express Mortgage Corp. in Stowe, Vt.This is partly because it's easier for large banks to lend through brokers than establish or continue operating their own locations.

Gary Clark, a 40-year-old nonprofit administrator who lives near Stowe, worked with a small local bank when he bought his home in 1996. Doing business with it gave him peace of mind, he says, in part because he knew the president. "If you go down the street and get to know them, your thinking is that they'd be more forgiving if you ever got into trouble with the mortgage," Mr. Clark says.

But when he refinanced earlier this year, he went to Mr. Stanton, hoping that Express Mortgage could help him simplify the multiple mortgages he held both on his house and recently purchased neighboring properties, as well as get him a lower rate.

"My assumption was that they'd get me the cheapest rate," he says. He refinanced with an Indiana-based lender that Express Mortgage found for him. The rate on his fixed 30-year loan declined to 6 1/8% from 7.5%. "It's more impersonal, but the rate was better than what I could get here."