Are you planning to get a new mortgage, or to renew an existing one? Most probably you are hesitant on what will be a better choice for you; banks or private mortgage brokers. In the past, the majority of the potential home buyers were turning to their banks in cases when they needed a new mortgage. However, currently, the situation is quite different, as nowadays home buyers also have the opportunity to apply for the services of a mortgage broker. Consequently, a natural question arises on what is the best option for you and for your specific situation. To find it out let’s understand how each one of them works, and analyze their individual advantages and shortcomings.
How banks work
First, it is important to understand that mortgage banks use their own money for the funding of mortgages and that all of the underwriters, loan officers, processors, and funders all work at the same company for the same company. After the successful consummation of a loan, it might be either sold to an investor or it might as well be kept at a lender’s portfolio.
Moreover, if you would choose to apply for a mortgage in the bank, they have loan officers who serve as the bank’s main sales force. They most often gain commissions for originating loans. The important thing to remember is that the prices they offer are not negotiable. Moreover, they are selling products offered by their employer, which means that they can as well limit the available options for you.
At the same time, loan officers can suggest you the same loan at various price points, from “no-cost” loans with higher rates to more expensive but lower discounted rates.
How brokers work
Brokers are considered to be the main acting salesforce for wholesale lenders. Typically, wholesale lenders send their brokers’ rate sheets, which includes listing the rates and prices available for each product. Usually, brokers are smaller than banks.
Noticeably, a loan with a higher rate may have “rebate” pricing This on its turn means that you can use this price to pay the broker’s commission or perhaps even other closing costs on behalf of the borrower. This process is also called a Yield Spread Premium, or YSP.
Observably, for loans with lower rates, the broker’s commission is paid by the borrower, which constitutes about a percent of the total loan amount.
Importantly, brokers usually work with a variety of wholesale lenders, which means that they have access to diverse products at many price levels.
Pros of mortgage banks
Below are the main advantages of mortgage banks to consider:
- They are the once to work on your loan from start to finish.
- Your loan officer deals with all the parties involved and has the most control over the overall process and the communication.
- They mostly offer lower pricing
- If you manage to work with an already know broker the bank will also provide you
- If working with a brick-and-mortar institution and a banker you already know is important to you, your local bank may offer the best experience.
Cons of mortgage banks
At the same time there are several shortcomings with banks compared to private mortgages brokers, which are listed below:
- You have to remember that you may pay more than you need to in a case when you do not shop effectively and strategically. This also means that banks do not have to reveal what they make on you, which is not the case when you are working with a broker.
- Unlike mortgages brokers, banks most often offer fewer products. At the same time, they are not obliged to tell you when they do not sell the best loan that is best for you.
- Even if you are a good candidate, there is a considerable chance that a conservative bank will not approve of you.
Pros of mortgage brokers
Brokers do operate differently from the banks. Here is how they can benefit you more:
- Remember that brokers tend to have more access to the offerings of many wholesalers. As a result, they may often provide you with better and more suiting products as the best choice for you.
- Brokers can be easier to negotiate with, as they have their own profit margins.
- Broker’s repayment is disclosed only on your closing statement.
Cons of mortgage brokers
Simultaneously, here are the drawbacks of mortgage brokers that you have to take into account:
- Typically, brokers have less control over the general process as they are not the ones working for the lender.
- Usually, brokers are able to offer you more complex loans. But this affects the financial aspect. The majority of the times they are more expensive than working with a bank.
- It’s probable that it would take you longer to close a broker’s loan, a concert that you have to consider if you have a tight deadline for a mortgage.