Mortgage Basics: Introduction – Part 1

Owning a home is part of the American dream, and if you have children there tends to be an even greater drive to make that dream a reality.

Very few Americans have the means to pay cash for a home, so borrowing the funds is a necessary evil. However, with low mortgage rates and plenty of existing homes for sale all across the country, the home buying experience is less of a nightmare than it might be otherwise.

If you’ve never bought a home before, or it’s been several years since your last purchase, please read on as we examine mortgage basics in this first in series of articles.

To begin with, home loans are available from several types of lenders--thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price.

You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of loan products and terms from which you can choose.

Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.

Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers’ advertisements do not use the word "broker." Therefore, be sure to ask whether a broker is involved.

This information is important because brokers are usually paid a fee for their services that may be separate from and in addition to the lender’s origination or other fees. A broker’s compensation may be in the form of "points" or fees paid at closing or as an add-on to your interest rate, or both.

You should ask each broker you work with how he or she will be compensated so that you can compare the different fees. Be prepared to negotiate with the brokers as well as the lenders.

Now that we have a basic grounding, the next installment will focus on some of the costs of borrowing.