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Avoiding Overcharges
Truth in Lending


Avoiding Mortgage Overcharges

When looking for a principal mortgage, you might consider using a broker. A mortgage broker does a lot of the difficult leg-work of checking out the market and finding you the best deal on your loan for you. However, using a mortgage broker also presents the risk of being overcharged, especially for unsophisticated customers.

Brokers are, by nature, independent contractors, and as such are free to charge whatever they choose. Brokers profit by adding an additional price to that quoted by a lender, called a markup. Brokers will often charge the highest markup they can get away with, especially if they believe the customer has not or will not shop to find out if the price is fair. The problem is further complicated by the unfortunate fact that many borrowers don’t have a true grasp of how much the broker is charging them until closing, when it is then too late to change any of the terms of the agreement.

There are two ways to prevent overcharges by mortgage brokers. The first is the time-consuming and difficult process of shopping other brokers. The second is to hire a broker to shop for you in exchange for an upfront fee.

This second method is often preferable, and works by forcing brokers to set a fee in advance. The fee needs to be specified in dollars, not in points or other percentage amounts. Setting a dollar fees gives the broker the same incentive to spend time on a small loan as he would a large loan. Many brokers don’t like operating in this manner, but others, called upfront mortgage brokers, operate exclusively under this method.

What constitutes a reasonable fee for an upfront broker is not an easy question, since it depends largely on the borrower’s individual characteristics. For example, a borrower with good credit who qualifies easily requires less effort on the part of the broker, so will be charged a lower fee than a borrower with poor credit or other factors that complicate the process.

 

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