H.O.M.E. Lending – A Closer Look
With the current average rate on a 30-year fixed mortgage hovering at about 3.5%, now is a great time to buy a home. Housing inventories are still very high as well, making this a buyers’ market. However, before you get started you need to decide whether you want to get your mortgage through a traditional bank or a mortgage company. H.O.M.E. Lending
For the purposes of this discussion a “mortgage company” is a broker who brings together borrowers and lenders. Although there are some privately owned mortgage lenders that do not necessary qualify as banks, they are few and far between. On the other hand, there are plenty of mortgage brokers form which to choose.
How Rates Are Determined
When mortgage lenders calculate interest rates for consumers, they start with something known as the base rate. This base rate is based on the Prime Rate as published daily by one of several sources. The Prime Rate is the interest rate the government charges banks for loaning them money.
Here’s an example to make this easy to understand:
- the government loans money to banks at a Prime Rate of 2.5%
- a mortgage lender wants to earn a minimum 1% interest on money it loans
- add those two numbers together and the base rate becomes 3.5%
Once a mortgage lender establishes its base rate there is little chance consumers will do any better when borrowing from that institution. Of course, the rate can go up depending on a borrower’s credit history, employment, and the size of the mortgage in relation to the value of the house.
Mortgage Companies Shop Around
As a broker, the mortgage company is not paid unless they secure a contract between a lender and borrower. That means the individual working on a specific deal has to do his best to find something that will appeal to both parties. Mortgage brokers accomplish this by shopping around.
They will take information from the borrower, combine it with information about the home as supplied by a real estate agent, and present the package to a series of lenders who will turn around and offer a mortgage package. The broker may then present all those offers to the client or ask lenders to do better. When a broker is satisfied that he has the best deal possible, he presents it to the lender borrower.
The ability to shop around is what allows brokers to find the best deals. They can look for loans backed by government programs like HUD and Fannie Mae/Freddie Mac, or they can solicit traditional loan offers from banks. Moreover, because they have so many options to work with, they have great flexibility.
Working with a mortgage broker is a good idea if you are planning to buy a home. Nevertheless, keep in mind you can also shop yourself. Do not simply accept the first deal the mortgage broker offers you unless your own research indicates it is the best deal you are going to get.