When applying for a new mortgage, a borrower can typically choose between going directly to a local bank or working with a mortgage broker.
Many people don’t know the exact differences between the two and I wanted to shed some light on this matter.
Mortgage Brokers work as the “middlemen” between the borrower and the bank securing wholesale rates for their clients. They typically get paid by the wholesale banks (also known as a “Rebate” or “Yield Spread Premium”), depending on what kind of rate they secure for the borrower. The client also has the choice of paying points (percentage points) to secure the lowest possible rate available – in this case, the mortgage broker would lock in a rate at “PAR” (no rebate to the broker) and instead, would earn their compensation based on the number of points the borrower decides to pay (typically 1% of the loan amount). Once the mortgage broker “brokers” the loan to the wholesale lender (who funds the loan), they typically sell your loan to the secondary market, otherwise known as Fannie Mae and Freddie Mac.
Banks work directly with the client and provide financing on the retail level. These banks work in very much the same way as mortgage brokers in that a borrower can choose to pay points / not pay points for very similar rates. Some banks are known as “Portfolio Lenders” which means that they service your loan as well and do not sell your loan to the secondary market. A big misconception in the mortgage business is that the big-name lenders like Bank of America, Wells Fargo, and Chase do not sell your loan to the secondary market – but in reality, they are probably the biggest sellers of securitized mortgages. Just because you receive a mortgage statement in the mail every month from Wells Fargo doesn’t mean they haven’t sold your loan; they are simply “servicing” your loan for another entity who is the actual owner of your mortgage.
Here is an outline of both mortgage brokers & banks to help you get a better idea.
- Able to shop your loan out to many wholesale lenders and provide the most competitive program that fits your needs.
- Can fund the “out of the box” types of loans that most major banks will not touch.
- More accessible to their clients – less bureaucratic
- Wholesale interest rates can be lower than bank (retail) rates offered
- Usually have an existing relationship with the Bank, making it easier to get started
- In some cases, a bank might offer you a better rate if you maintain a certain amount of money with the branch
- The ability to add another mortgage (ie: 2nd loan or Line of Credit) since they already have your credit on file
That said, your experience can really vary based on who you choose to work with, as some banks and lenders may overcharge you and give you the run-around, while a mortgage broker may do an excellent job and secure a lower mortgage for you.. and vice versa. It really depends on your situation and the specific bank or broker you ultimately work with, so be sure to shop around and ask for references.