New rules change the way mortgages are offered to borrowers

Live and learn.

In the past few years, many homeowners have found it impossible to live with their mortgage.

Recently, the Federal Reserve instituted a new rule on how mortgage brokers are paid, learning from what many observers say caused trouble for borrowers.

Among other things, the rule bans brokers from receiving a bigger fee from a loan company based upon a higher interest rate charged to mortgage borrowers. Before, “There was an incentive for brokers to (sell) loans that aren't best for borrowers,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

Now, brokers can be paid either from fees paid up front by the borrower or from a preset, agreed-upon percentage of the loan that is paid by the loan company, “but they can't be paid both ways,” said Jack Guttentag, professor emeritus at the Wharton School of the University of Pennsylvania. He also runs the website mtgprofessor.com and writes a weekly mortgage column that is carried in the Daily Herald.

Many third-party mortgage brokers have opposed the rule. With a set profit for every loan that's made, brokers have less flexibility to serve individual customers, said Jeri Lynn Fox, past president of the Illinois Association of Mortgage Professionals. Also, Guttentag says there were and are honest brokers who didn't put customers in unfairly high-rate loans.

While regulators and factions of the lending business have rigorously debated, homebuyers are only interested in one question, said Ira Rheingold, executive director of the National Association of Consumer Advocates: “How do I find a well-priced mortgage?”

Here, a primer on mortgage shopping today:

Banker or broker?The rule, which went into effect April 1, impacts only mortgage brokers, not banks.John Q. Public, looking to refinance or buy a home, may not know the difference between the two, and simply walk into any neighborhood office advertising mortgages.A broker is not working directly for the company providing the money for the loan, Guttentag said. Brokers often have relationships with several loan companies. Indeed, brokers tout these multiple relationships as a consumer advantage in that they can select the best terms among several lending firms.Loan originators at banks, on the other hand, work for the firm providing the funding for the mortgage.For consumers unsure about who's who, simply ask if the person sitting before you is a broker or loan officer at a bank, Guttentag said.Fee for serviceNo matter where you seek a mortgage, you'll be asked to provide plenty of information and paperwork. And, both banks and brokers must be compensated for processing all of it.While rule now dictates that brokers be paid either by a lending company or a borrower but not both, banks earn their money from both a fee charged to the borrower and/or a slightly higher interest rate, Rheingold said.When borrowers elect to use a broker who is paid by the lending company, they still will encounter some fees, like those charged by an appraisal firm or title company.Comparison shopThen, talk to a couple of lending firms, Rheingold suggests. However, #8220;You can't just call around and ask, #8216;What are your best rates,' #8221; said Charles Chedester, president of the Iowa Association of Mortgage Professionals. For free, or for a small credit check fee, most firms will talk about your savings, income and home you expect to buy, giving an idea of what rate you might qualify to receive, he said.Then, potential buyers must calculate whether it's worth it to pay an upfront fee. For instance, Chedester said, it may be worth it to you to pay $4,500 up front for a 5 percent, $250,000 loan, rather than no upfront fees for a 5.25 percent rate.