Starting the homebuying process requires you to make many choices, all in a fairly quick timeframe. You have to decide that you’re ready, decide what type of home and area you want to search in and find the right person to guide you in your search (see last week’s post to learn more about choosing a real estate broker – or just call us!). Then you have to decide how you want to finance your purchase.
A mortgage is a long-term loan secured by real estate. A bank or other institution is loaning you money with the agreement that you will pay them back over time at an agreed upon interest rate. The appeal of a mortgage loan is it allows you buy an asset that you otherwise could not afford with the expectation that its value will increase over time, also known as leverage. This is an asset in your financial portfolio, gives you a tax break, and of course, gives you a place to live.
Your real estate broker can refer you to a few mortgage lenders and you can inquire with your primary bank for a mortgage loan. You have the option to use a mortgage broker or a direct lender. We’ll go through the benefits and differences below.
What is the difference between a Mortgage Broker and a Direct Lender?
A Mortgage Broker is an intermediary between you and a lender. They will do all the work of shopping for competitive rates and multiple programs that best fit your needs. They can take the headache and time out of the process by doing all of the background work - but of course, this comes at a cost. Mortgage Brokers charge a fee that is a percentage of the mortgage amount. That fee is paid by the borrower (you).
A Direct Lender lends money through a financial institution that offers mortgages (typically a bank or savings and loan association). It’s a good idea to ask the lending department at your personal bank or credit union about mortgage loan options. They will do their due diligence to find you the best program and rate; they also may be able to offer you a discount on points.
Your real estate broker will have experience working with certain lenders and banks that have a good reputation in the marketplace. Ask your broker to share their recommendations, then do your own research and ultimately choose the option that best fits your needs. (FYI - It is prohibited in Washington state for a real estate broker to obtain any “kickbacks” from a lending institution for referred business. Refer to: RCW 18.85.053 & RESPA.)
Be wary of using online lending platforms. While their numbers and rates seem competitive, they usually make up for those numbers on the backend by charging you multiple fees or “points.” They also have a reputation for not being able to close transactions on time and for having poor and ineffective communication with their borrowers.
What is a “point?”
Mortgage “points,” also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments. Essentially, you pay some interest up front in exchange for a lower interest rate over the life of your loan.
Plan to meet with a couple lenders to compare rates and terms -- and make sure you understand each thoroughly. Compare multiple loan products to get the best product for your specific needs and goals. You’re on your way to homeownership!
Fresh Look would love to help you with your real estate journey. Contact us today to get started!
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Disclaimer: The Fresh Look Real Estate team is not a financial institution. The mortgage information contained in this post is very general & broad. You should always speak to financial professionals to review your personal financial situation, goals, and outcomes of various options.