Shopping for a mortgage can be one of the more arduous steps in buying a home. A mortgage broker can simplify this process by connecting home buyers with appropriate loans, preparing application materials and guiding the borrower through underwriting and closing. Plus, unlike loan officers who work for specific banks, mortgage brokers have access to a wider range of mortgage products which means borrowers may be able to get more favorable interest rates.
Working with a mortgage broker is a great option for anyone who wants to remove some of the legwork and headaches from the mortgage process. But brokers can be especially helpful for first-time home buyers who need extra support. Keep in mind, though, that mortgage brokers work on commission and may have preferred lenders that don’t always offer the best interest rates. Therefore, if you have experience buying and financing real estate and feel comfortable shopping for a mortgage yourself, you may save money by working without a broker.
What Is a Mortgage Broker?
A mortgage broker is a licensed and regulated financial professional who acts as an intermediary between borrowers and lenders. Brokers identify loans that meet borrower needs and then compare rates and terms so the home buyer doesn’t have to. Mortgage brokers have the ability to offer mortgage products from a network of lenders and provide access to a greater range of products than loan officers, who are limited to their own bank’s offerings. Mortgage brokers then guide clients through the application and underwriting processes, often by compiling application materials, pulling the borrower’s credit history and verifying income and employment information. Finally, mortgage brokers work with everyone involved in the transaction, including the real estate agent, underwriter and closing agent, to ensure the loan closes on time.
Mortgage Broker Vs. Loan Officer
Mortgage brokers are financial professionals who work with a number of lenders to offer a wide range of loan programs to consumers. These brokers match borrowers with specific lenders and loan programs that best meet their needs for a fee or commission. A loan officer, on the other hand, works for an individual bank or other direct lender and can only sell mortgage products offered through that institution. For this reason, mortgage brokers give clients access to a much broader array of lenders including lesser-known institutions that may offer more favorable terms than well-known, brick-and-mortar banks.
How a Mortgage Broker Works
Perhaps you want to buy a house and you don’t have an existing banking relationship or aren’t satisfied with the rate offered by your current mortgage lender. You can call a mortgage broker who works with multiple lenders to help borrowers identify the best loans and rates from a broad range of loan programs. Using a mortgage broker can also save you a tremendous amount of time. Rather than contacting several lenders individually and poring over complicated loan offers, you simply work with a broker who determines how much loan you’re likely to qualify for and handles all of the legwork for you. Brokers then help the home buyer compile the necessary documentation and shepherd them through the application and underwriting process. Upon closing, the mortgage broker earns a borrower fee or lender commission of between 0.50% and 2.75% of the total loan amount depending on the broker’s fee structure and whether they’re being paid by the mortgage lender or borrower.
Types of Mortgages
There are several types of mortgages available to borrowers, including conforming and non-conforming loans; conventional fixed-rate mortgages, which are among the most common; adjustable-rate mortgages (ARMs); balloon mortgages; FHA, VA and USDA loans; jumbo loans; and reverse mortgages.
Fixed Rate Mortgage:
With a fixed-rate mortgage, the interest rate is agreed upon before you close the loan, and stays the same for the entire term, which generally ranges up to 30 years. Typically, longer terms mean higher overall costs, but lower monthly payments. Shorter loans are more expensive each month but cheaper overall. No matter which term you prefer, the interest rate will not change for the life of the mortgage. For this reason, fixed-rate mortgages are good choices for those who prefer a stable monthly payment.
Adjustable Rate Mortgage:
Under the terms of an adjustable-rate mortgage (ARM), the interest rate you’re paying can be raised or lowered periodically as rates change. An ARM might be a good idea when the introductory interest rate is particularly low compared with a fixed-rate loan, especially if the ARM has a long fixed-rate period before it starts to adjust. An ARM can also be an option if you don’t plan to stay in the home for longer than that introductory period.
Some examples of an adjustable-rate mortgage would be a 5/1 ARM and or a 7/1 ARM, explains Kirkland. In a 5/1 ARM, the ‘5’ stands for an initial five-year period during which the interest rate remains fixed while the ‘1’ indicates that the interest rate is subject to adjustment once per year. During the adjustable-rate portion of an ARM, the interest rate charged is typically based on a standard financial index, such as the key index rate established by the Federal Reserve or the Secured Overnight Financing Rate. Most ARMs come with a cap (for each adjustment and/or for the life of the loan), so your rate can only increase up to a certain amount.
With a balloon mortgage, payments start low and then grow or balloon to a much larger lump-sum amount before the loan matures. This type of mortgage is generally aimed at buyers who will have a higher income toward the end of the loan or borrowing period than at the outset. It also might be a good approach for those who plan to sell the property before the end of the loan period. For those who don’t intend to sell, a balloon mortgage might require refinancing to stay in the property. Buyers who choose a balloon mortgage may do so with the intention of refinancing the mortgage when the balloon mortgage’s term runs out, says Pataky. Overall, balloon mortgages are one of the riskier types of mortgages.