If you would rather not shop for a mortgage by visiting your local banks, you have two attractive options – hiring a mortgage broker or comparison-shopping online. Is one of these options preferable to you, and are the online options reliable?
Certainly, there are less-reputable websites for mortgage shopping – just as there are less-reputable mortgage brokers. In either case, it's important to do due diligence. Get reviews and references, check Better Business Bureau ratings, and don't be afraid to dig into anything that doesn't seem right. Instincts are important.
Here are some basic pros and cons of each path.
Online Shopping Advantages:
- Convenience – You can shop on your preferred schedule, 24/7. Sites such as Lending Tree provide some level of comparison-shopping.
- Testing Scenarios – Online calculators allow you to test the effect of different terms (length of loan, interest rates, closing costs, etc.). By calculating different scenarios, you will get a feel for what interest rates and costs you can tolerate.
- Real Time Comparison – Volatility can be significant, and most reputable websites update their pricing information in as close to real time as possible. A good broker should also have up-to-date information, but the Internet provides an easy double check.
- Prevents Low-Balling – Some brokers may offer a low expected market rate, but switch terms at the time of the loan based on market conditions. Online vendors use their currently quoted rates.
Online Shopping Disadvantages:
- Time – It takes time to go through the websites and correctly compare all the terms and conditions, especially if you aren't comfortable with the jargon.
- Credit Score – You may not be able to get any online pricing or service at all if you have a relatively low FICO score.
- Limited Service – If things go wrong, you want to be able to contact the vendor to resolve the issue. Check reviews for a vendor's customer service (and how often clients have to use it).
Mortgage Broker Advantages:
- Variety – A competent mortgage broker can compare different lenders and cut through confusing language to compare deals thoroughly and accurately.
- Matching – A mortgage broker may provide a better match of lender to buyer and keep a potential buyer from wasting time.
- Service – With a mortgage broker, you have a person to deal with directly for any questions and concerns.
Mortgage Broker Disadvantages:
- Diverging Interests – The mortgage broker may not have your best interests at heart. He or she may also be tempted to steer you towards a larger house than you can afford to increase their fee (although the recent Consumer Finance Protection Bureau rules address this problem through stricter qualifications and increased scrutiny).
- Lenders – Some lenders do not deal with brokers anymore, claiming that their default rates are higher with loans acquired through brokers.
It's a good idea to start with the Internet, whether or not you finish there. There are plenty of resources on how to compare different types of loans and loan terms, how to determine comprehensively all of the fees and charges involved in mortgages to compare costs correctly, and other useful background information. Mortgage brokers deal with these subjects every day, so the more research you do upfront, the more likely you are to detect when a broker is being honest or trying to mislead you. You will also know the correct questions to ask.
In short, use both. Start with the Internet to prepare for a broker, and if you can't find a broker you like and trust, follow through with the online vendors – or reconsider going directly to a lender.