Brokers, Lenders and Points, Oh My!

You can deal with a mortgage broker, or you can deal with the lender directly. A mortgage broker is the liaison between you and the lender. Because they deal on the wholesale level, brokers can sometimes offer you loan programs you won't find if you deal directly with the lender. Brokers make their money by taking a percentage of the amount you borrow (typically 0.5 percent to 2 percent.) The lender doesn't mind paying this fee because the broker handles the loan paperwork and hassle.

Perhaps you can already see a problem here: The bigger the loan you take on, the more money the broker makes on the deal. Because of this arrangement, brokers can occasionally be the used car salesmen of the mortgage world. They may try to persuade you to get a bigger mortgage than you initially wanted. This is especially true if you opted not to get pre-approval on a mortgage, and have fallen in love with a house above your means. Some brokers see the house hunger in your eye and want to make it possible for you to have the house you covet, even if it seems impossible. Such "predatory lending" practices contributed to the current meltdown in the mortgage industry and record foreclosure rates.

But with all professions, a few bad apples shouldn't tarnish the industry as a whole. Honest brokers can get you great deals, and they can walk you through the mortgage process and all of its accompanying paperwork. Shop for a broker you can trust and ask friends and family for referrals. Remember, brokers are paid by the lender, not by you.

How are lenders paid? With points. One point = 1 percent of interest. Typically, the higher the number of points you pay, the lower your interest rate. Do the math. If a lender offers you a loan at higher points but lower interest than the competition, it may not be the deal it appears to be.