Shop for Your Mortgage Loan

Would you pay $30,000 for a car if you could buy it for $20,000? Of course not. But it turns out that many people have done the equivalent with their mortgage loans. On May 30, 2007, CNN.money.com reported that many subprime borrowers could have gotten a prime mortgage. See http://money.cnn.com/2007/05/29/real_estate/could_have_had_a_prime/index.htm?postversion=2007053012. That means a lot of people got stuck with a more expensive mortgage than necessary.

Subprime mortgages can have an interest rate 3% higher than a prime mortgage. As the CNNMoney article points out, that difference can increase the monthly payments on a $200,000 mortgage by $300, or $3,600 a year. Can you afford to throw away $3,600 a year? That would be almost all the money you’re entitled to contribute annually to an IRA.

Why does this happen? Because mortgage brokers are rewarded to sell subprime loans. They are paid by commission, and a subprime mortgage’s commission can be as much as 5 times greater than the commission for a prime mortgage. So, like the car salesperson who wants you to buy a model with all the options, a mortgage broker has the incentive to sell you a subprime mortgage, whether or not you need one.

Who do you think covers the cost of the high subprime mortgage commissions? You, the borrower, do, if you take out a subprime mortgage.

What can you do? If you’re already in a subprime mortgage and think you're prime quality, try to refinance into a less expensive mortgage. If you're just looking for a mortgage loan, comparison shop. Shop for a mortgage just like you would shop for a car. People routinely contact several car dealers when looking for the best deal on a car. (See our recent blog on how to get a good deal on a new car: http://blogger.uncleleosden.com/2007/05/buy-new-car-without-haggling-and-save.html.) Contact several lenders—try the bank where you have an account, or a credit union if you can join one. Then try the next few banks and credit unions down the street. Do this without going through a mortgage broker, and see what quotes you get.

If you want to use a mortgage broker, look for one who will work for a fixed fee that is set in advance, without any commissions or compensation from anyone but you. A fixed fee will reduce the incentive for the broker to put you into a high-interest rate mortgage you don’t need. An organization called Upfront Mortgage Brokers Association (www.upfrontmortgagebrokers.org) may be able to help you find a broker willing to work for a fixed fee.

Interview a mortgage broker before hiring him or her. Ask about all of his or her sources of compensation and whether the broker will be paid more if you are sold a mortgage with features that may be costly to you (like higher or increasing interest rates or a prepayment penalty). Also ask the broker how many lenders he or she deals with regularly. You want to find out if the broker will work aggressively to get you the best deal, or will simply place you with a lender with whom he or she has had a long-standing relationship. Not all mortgage brokers are crooks, but it pays to be careful.

Keep your mortgage loan simple: look for a 30-year or 15-year fixed rate mortgage. These loans are pretty straightforward, which makes comparison shopping easier. Also, your risks are lower because by definition the interest rate won’t go up. See our earlier blog about why the right mortgage loan helps you build wealth
(http://blogger.uncleleosden.com/2007/05/how-right-mortgage-loan-helps-you-build.html).

Crime News: You’ve heard of cat burglars stealing jewelry. This one must have been a tiger burglar. http://www.wtop.com/?nid=456&sid=1153406.