Loan Lessons

Live and learn.

In the past few years, many homeowners have found it impossible to live with their mortgage.

Recently, the Federal Reserve instituted a new rule on how mortgage brokers are paid, learning from what many observers say caused trouble for borrowers.

Among other things, the rule bans brokers from receiving a bigger fee from a loan company based upon a higher interest rate charge on the mortgage a borrower takes. Before, "There was an incentive for brokers to [sell] loans that aren't best for borrowers," asserts Ira Rheingold, executive director of the National Association of Consumer Advocates.

Now, brokers can be paid either from fees paid up front by the borrower or from a pre-set, agreed-upon percentage of the loan that is paid by the loan company, "but they can't be paid both ways," explains Jack Guttentag, professor emeritus at the Wharton School of the University of Pennsylvania who runs the website mtgprofessor.com.

Many brokers have opposed the rule. With a set profit for every loan that's made, brokers have less flexibility to serve individual customers, complains Jeri Lynn Fox, past president of the Illinois Association of Mortgage Professionals. Also, Guttentag notes that there were and are honest brokers who didn't put customers in unfairly high-rate loans.

While regulators and factions of the lending business have rigorously debated, consumers are only interested in one question, says Ira Rheingold, executive director of the National Association of Consumer Advocates: "How do I find a well-priced mortgage?"

Here, a primer on mortgage shopping today:

Banker or Broker?

The rule, which went into effect April 1, impacts only mortgage brokers, not banks.

John Q. Public, looking to refinance or buy a home, may not know the difference between the two, and simply walk into any neighborhood office advertising mortgages.

A broker is not working directly for the company providing the money for the loan, explains Guttentag. Brokers often have relationships with several loan companies. Indeed, brokers tout these multiple relationships as a consumer advantage in that they can select the best terms amongst several lending firms.

Loan originators at banks, on the other hand, work for the firm providing the funding for the mortgage.

For consumers unsure about who's who, simply ask if the person sitting before you is a broker or loan officer at a bank, suggests Guttentag.

Fee for Service

No matter where you seek a mortgage, there'll be plenty requested information and paperwork. And, both banks and brokers must be compensated for processing all of it.

While rule now dictates that brokers be paid either by a lending company or a borrower but not both, banks can earn their money from both a fee charged to the borrower and/or a slightly higher interest rate charge, explains Rheingold.

When borrowers elect to use a broker who is paid by the lending company, they still will encounter some fees, like those charged by an appraisal firm or title company.

Comparison Shop

Then, talk to a couple of lending firms, suggests Rheingold. However, "You can't just call around and ask, 'What are your best rates,'" notes Charles Chedester, president of the Iowa Association of Mortgage Professionals. For free, or for a small credit check fee, most firms will talk about your savings, income and home you expect to buy, giving an idea of what rate you might qualify to receive, he adds.

Then, consumers must calculate whether it's worth it to pay an up-front fee. For instance, illustrates Chedester, it may be worth it to you to pay $4,500 up front for a 5-percent $250,000 loan, rather than no up-front fees for a 5.25 percent rate.