Making Sense of Mortgage Options

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When you are shopping for a mortgage that fits your limited budget and tight timeline, you’re probably facing two choices: a consumer bank or a mortgage broker.

A consumer bank is where you likely have your checking account. Also known as a retail bank, a consumer bank handles basic banking needs such as checking and savings accounts, automobile or mortgage loans, and certificates of deposit.  A consumer bank also offers mortgages, but it is not the main thrust of its business model.

A mortgage broker is an intermediary between you, as the borrower, and non-bank lenders to find the best fit for your mortgage needs. A mortgage broker effectively does your mortgage shopping for you, working with a variety of lenders who can offer varying degrees of loans based on interest rate, down payment requirements, fees, and other terms.

A consumer bank is more likely to turn you down if your credit score, debt to income ratio (the percentage of your income that goes toward paying off debt each month), or financial liabilities make you an unattractive borrower. A mortgage broker, on the other hand, will find a lender who will work with you, even if you are likely to pay a higher interest rate because of all of your financial liabilities.

Consumer Banks: Considerations

Consumer banks offer checking and savings account services, as well as CDs and other relatively basic banking services. They use the money customers deposit, either investing it elsewhere, or offering loans and profiting from the interest on those loans. Banks also make money on various banking related fees.

  • Consumer banks are not in the business of loaning money to risky customers. They are not financially structured to accept or anticipate defaulted loans that injure the bottom line. Because of that, applying for a mortgage through a consumer bank requires more paperwork, and much more time, than applying for a loan through a mortgage broker. Consumer banks do not wish to make a mistake on the mortgage they offer. They are not in a rush to finalize your mortgage. First, they will satisfy themselves that you are in a position to pay back the mortgage over time.
  • Your credit score and the number of years you want to extend the mortgage (usually 15-year, 20-year, or 30-year) will determine the interest rate you are offered. While it is possible to shop between consumer banks for the best mortgage offer, usually the difference is no more than a quarter percentage point. You will probably make your decision on the mortgage loan you accept based on other factors.
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Your credit score and the number of years you want to extend the mortgage (usually 15-year, 20-year, or 30-year) will determine the interest rate you are offered. (Shutterstock)

More than just the mortgage

There is more than just a mortgage to consider when you apply for a loan from a consumer bank.  While a mortgage broker is compensated based on the size and nature of the loan, a direct lender charges the borrower a variety of fees and charges.

This difference may work for you or against you: the mortgage broker will be highly motivated to work with larger mortgages. On the other hand, a direct lender may charge lower interest rates, but recoup their costs in fees and charges.

Because their interest rate is lower than that you might get from working with a mortgage broker, consumer banks are likely to want to keep their own costs down by charging you processing fees, appraisal fees, or a fee to pull your credit report. There are likely to be closing costs involved as well.

Some fees can be paid up front and others can be rolled into the mortgage payment. When discussing your mortgage payment with your bank officer, may certain all those fees are added into your monthly payment amount.

Mortgage Brokers: Considerations

A mortgage broker does not offer loans. Instead, the broker works with a series of private lenders or non-consumer banks to find the best deal for you. The broker works on commission, sometimes paid by the borrower as part of the mortgage acceptance process.

Pros:  The advantage of working with a broker is a matter of both time and money. The broker can discuss your financial situation, your financial liabilities, and find multiple lenders that fit your needs. A mortgage broker effectively shops for you, and can indicate to you the advantages and disadvantages to each mortgage offer you receive. You save time, and you likely have a sense that you have received the best possible offer for your situation.

When working with a mortgage broker, there is a greater sense of negotiation, while working with a consumer bank will be fairly cut and dried. The time you spend with a mortgage broker will benefit you with the best possible offer. You can indicate what you like or don’t like about a particular loan offer, and the broker can respond in kind.

Cons: The mortgage broker has no control over the loan acceptance process. Once a loan is selected, the broker is out of the loop. Lenders may not work at the speed you want, and the paperwork process can be slower than with a consumer bank. Broker’s fees may also be more expensive, because you may be offered more complex loans than a consumer bank offers. The complexity increases the lender cost, and that increase is transferred to you.

You can compare the offers from consumer bank and mortgage brokers, and choose the right mortgage to purchase your dreaming home. (4 PM production/Shutterstock)

Loan choices

Working with a mortgage broker is certainly going to provide you with more choices than working with a consumer bank. Consumer banks may only be able to offer you the products in their portfolio, while a mortgage broker has access to a wider range of mortgage products.

When it comes to mortgage terms and interest, the following are some of your options:

A mortgage broker is more likely than a consumer bank to ask you to consider all of these options:

  • Fixed-rate mortgage: Maintains the same interest charge over the life of the loan.
  • Adjustable-rate mortgage: your interest rate will change over the life of the loan as federal benchmark or prime interest rates rise or fall.
  • Hybrid adjustable rate mortgages: These mortgages offer a fixed rate initially, commonly for a number of years, but usually no more than 10. At the end of the period, the rate becomes adjustable and is determined by the current federal interest rate, which could be higher or lower than your initial fixed rate. These mortgages are a bit of a gamble. Most hybrid rates do carry a cap on how much the interest rate can increase annually once the fixed rate period is over.

The Hard Sell

A consumer bank is going to want you to leave a happy customer. They will offer you special deals on interest-bearing checking accounts or other products once you agree to a mortgage. Consumer banks aim to please, especially when working on the most important financial decision of your life.

Mortgage brokers work with lenders who really want you to get you under contract. The drive to lend is greater for private lenders than it is for consumer banks, and you may end up dealing with a hard sell process. The broker, who only gets paid if you agree to a mortgage, is going to do whatever he can to get you to agree to a loan.

home equity loan
Mortgage brokers work with lenders who really want you to get you under contract, while a consumer bank is going to want you to leave a happy customer. (William Potter/Shutterstock)

Bottom Line:  Get the Best Deal Possible

In general, if your financial house is in order, your debt-to-income ratio is at an acceptable level, your credit score is assuredly high and your financial liabilities list is short, you will receive an acceptable mortgage offer from a consumer bank. But, if you want to make absolutely certain you are getting the best deal possible, ask a mortgage broker to beat what the consumer bank offers.

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

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