Deciding on where to get a mortgage can define your entire home ownership or investment experience. Because of this fact, you should always hunt for the best terms possible.
You will have two main choices: a bank/lender or a mortgage broker. Understanding each will help explain their respective strengths and weaknesses, as well as which one you should ultimately choose.
Banks and Lenders
Banks and lenders offer all sorts of loans. Sometimes they grant large loans for the purposes of buying a house, called mortgages.
When someone approaches a bank or a lender looking for a mortgage, that institution will have a limited selection of products. These can range from 1 to 30 years and can come with fixed or adjustable interest rates. Some mortgages have special terms for unique purposes, such as financing for developers or property investors. Members of the bank or certain organizations like veterans may receive preferred terms.
Banks offer advantages for anyone who knows what they want. Someone hunting for a mortgage can objectively compare rates. They can also ask lots of detailed questions to find advantageous discounts or special programs. A drawback is that this process takes a lot of time.
Mortgage brokers are independent agents or companies who find mortgages for their client. A client will hire a broker and tell them about the property, the price and the general mortgage terms they are looking for. After that, the broker sets to work calling companies on their behalf.
An obvious advantage of a broker is that they do a lot of the work for you. They may also have access to “inside” rates that a typical bank inquiry would not reveal. Brokers are also generally easier to get in touch with than banks, making themselves available to their clients whenever they need them.
However, a broker will usually not be able to look as deep as the client themselves. The broker may not ask as many questions, or they may not have the information they need to secure a preferential rate.
Which One Should You Use?
Generally, you should approach your own bank or credit union first to see what they can offer a member. After getting an idea of a base rate, you can call a few other companies to get a feel for the market.
If you receive a bunch of rejections, or all this leg work has worn you out, you can “tag out” and have a mortgage broker step in. They will be able to work hard on your behalf to track down the loan you want.
Make sure to ask about your broker’s fees, though. Some brokers are paid via a YSP or “Yield Spread Premium.” This term refers to the broker closing out your loan with a higher interest rate than the original terms called for. They will receive a commission for this arrangement, while you are stuck with a higher interest rate.