Now that you’ve made the decision to buy a house, the next step is getting your financing together. Applying for a home loan through your personal bank may seem like the obvious choice, but this isn’t the only place to secure financing. You have the choice of working with a mortgage lender or a mortgage broker.
Some people use the terms “broker” and “lender” interchangeably, but these are not one and the same. Before you can decide which one is the right fit, you have to understand how brokers and lenders differ.
What is a Mortgage Broker
A mortgage broker is not a bank or lender, but rather a middleman that connects borrowers with lenders. Mortgage brokers represent lenders and their loan programs. These professionals are mortgage experts, so they’re in a position to explain and recommend various loan products based on your circumstances.
Shopping around is one of the best ways to find a mortgage with a low interest rate. But since comparison shopping can be tedious, you may not have the patience for the job. A mortgage broker does the legwork for you. Your broker researches programs and presents the findings to you, at which point you can choose a particular loan.
Using a broker saves time because it offers a faster way to find and compare mortgage options. Without a broker’s service, you would have to contact banks individually to learn about their rates and products.
What is a Mortgage Lender?
A mortgage lender is an actual bank. This can include commercial banks, community banks, credit unions, etc. If you have a preexisting relationship with a bank, using this institution for a mortgage can be beneficial. It’ll be easier to speak directly with a loan officer and underwriter; and depending on the strength of your relationship, you may receive a more favorable mortgage rate. When you work with a mortgage broker, the broker communicates with the bank and you might never speak with the decision maker.
Which Should You Choose?
From a financial standpoint, you may save money working directly with a lender. Whether you use a broker or a lender, you’ll pay for services. Brokers receive payment in different ways. The typical loan origination fee for a mortgage is 1% or 2% of the mortgage loan. A bank may only charge a 1% fee, whereas a broker may charge 2% and split the fee with the lender. Then again, a broker may charge a flat fee for services, which is included in your closing costs.
Be aware that some mortgage brokers may increase your mortgage rate as compensation. If your broker can get you to pay a higher mortgage rate, the company may receive a bonus from the lender.
Bottom line: a broker is an excellent choice if you’re seeking information on various loan programs, but you don’t want to contact banks individually. Just make sure you ask questions and understand how your broker gets paid.
