Mortgage brokers are in sales, and like many salespeople, they work on commission. Broker commission rates are neither cheap nor exorbitant compared with other commission-compensated sales. What's most typical is one percent of the loan amount.
Fortunately, the charges of a mortgage broker are easy enough to evaluate if you're armed with some knowledge of the market. What rates are being charged by his competitors, the banks? (The calculation must include all fees and costs as outlined in "What to do: Mortgage Basics.")
Armed with that knowledge gleaned from ads and lender web sites, the next question is very much like considering whether to pay "points" on a mortgage. Do the resulting rates and terms justify the extra one percent tacked onto your beginning loan balance?
The decision is akin to deciding whether to pay discount points to buy down your interest rate. You must consider the added cost just as you'd evaluate any investment. What will be its monthly "return," and how many months will it take to pay off? That part of the calculation is precise, using a mortgage calculator such as the one on Trulia.
Beyond that, the evaluation takes some degree of judgment. For example, the value of an eight percent annualized return depends on where you think interest rates in general are going, and no one really knows.
A nimble broker should be amenable to removing a commission charge in exchange for a higher interest rateâ€”just as doing so may negotiate away the assessment of points. In such a case, the broker still gets paidâ€”by his client, the lender, in the form of a payment you'll never see. So again the question is, what is the point? (This too is best answered with the aid of an online mortgage calculator.)
To cut out the middleman and avoid commissions, you can indeed borrow directly from a bank. Major lenders have professional salespeople who will smooth the way to the closing. But being wed to one bank clearly limits their ability to compete on "price" (i.e., rates, points, and fee structures). On the other hand, mortgage lending is so competitive that a customer armed with a written offer from elsewhere can probably drive a bargain as if dealing with an independent broker. Don't forget the oldest and most valuable technique in any negotiation. When necessary, walk away.
For the truly determined, a more exotic approach to commission avoidance comes from the real estate investor community. Borrow from a hard money lender and there will be no commission, just high interest rates and plenty of points; plus the threat of losing the property and still owing the money. The approach may make sense for some people who think they'll qualify for a conventional FHA-backed refi in, say, 90 days, but are determined to own the property today.