Mortgages - You Get What You Pay For

In the last installment, Rate Shopping - The Story of the Too Low FICO, we went over how rate shopping can hurt your FICO score. We went over the one way to shop for a mortgage and still save that FICO score of yours from dropping like a rock. Now we’re going to talk about a simple concept that my grandma taught me, and I’m sure she’d like me to pass it on. What is it? You get what you pay for.

That’s right, I’m sure you’ve heard this before, but probably didn’t realize that it applies to mortgages also. Not just mortgages, actually, but mortgage brokers. Before I go any further, I should mention that most people don’t realize exactly what a mortgage broker does. When most people think about shopping for a mortgage they think about calling several banks, getting quotes on the current rates, and picking the lowest one. Makes sense, right? Sure, but let’s say you submit an application on LowerMyBills or LendingTree to find the best rates available. Most of the companies calling in response are mortgage brokers, not banks. If you’re not sure what a mortgage broker is, I’ll write a post soon about the difference between brokers and banks.

If you didn’t know this, don’t worry; those websites don’t exactly clarify. I mean, seriously, LendingTree advertises having banks compete over you. Banks…they never mention brokers.

So anyway, a bunch of mortgage brokers call you and try to earn your business - you ask each of them what their rates and closing costs are. Well, brokers can charge whatever you’re willing to pay - assuming it’s within the guidelines of the law. On the other hand, a bank may have a standard fee that they charge on a given loan. So, you have a lot more room to negotiate with a broker than you do with a bank. So negotiate those fees down as far as possible and make sure you get the best deal, right? Wrong.

Remember, you get what you pay for.

Negotiation is fine and dandy, but that broker has to feel like doing business with you is worth his time; and if that broker is good, then his time is valuable. So what happens when you make it clear that you’re not willing to pay that 1% or 2% broker fee? The broker decides the deal is not worth his time and moves on. Suddenly you’ve weeded out the best of the best, and the only broker left is the one that’s willing to do the deal at little cost; and since you don’t get good for cheap, that broker probably isn’t the best. If you refinance more than a few times in your life, a good broker can be worth his weight in gold.

Why am I telling you this? Because every day I speak to potential clients, and every day I see clients go with other brokers who offer their services at very little cost.

So, by trying to pay the least closing costs possible, you’ve weeded out the best brokers, and only the worst remain to do business with. Not only that, but, unfortunately, there are a lot of unscrupulous brokers in this business. Some of these brokers are willing to lie, cheat, and steal to make a buck. I’ve had people chose another broker over me because that broker offered a seemingly unbeatable deal that I knew wasn’t real. The only thing I can do in that situation is tell the client that I don’t think the deal is a valid one and that I’d be there to help them if things turn out to be different; sometimes they come back after already having spent a lot of time and $300-400 on an appraisal that the dishonest broker now owns. It usually isn’t until they get to the signing table that they realize things have changed. By then, some clients have invested so much just to get to that point that they sign anyway.

So, how can we get the best deal on a mortgage and avoid all these potential problems? Well, we’ll cover that in the next installment.

Related Articles:

Mortgage Shopping - It’s A Jungle Out There
How to Save Money With a Mortgage Broker
Rate Shopping - The Story of The Too Low FICO
Who Has Your Social Security Number?
Mortgage News - AM Edition - Thursday, September 04^th, 2008