Refinancing Your Home: Should You Use a Mortgage Broker or a Mortgage Banker?
Mortgage brokers work with wholesale mortgage lenders. Wholesale mortgage lenders’ only function is to underwrite and fund home loans. What they don’t do is maintain offices, pay sales staff, originate mortgages, or process loans. Brokers fill that function for them.
Mortgage Brokers’ Strengths
Mortgage brokers can be especially helpful when you have a tricky loan, with challenges like recent self-employment, credit issues, or unusual property. They can send your information out to dozens of lenders until they find one ready to approve your application. A good broker is familiar with the guidelines of many lenders and can more readily locate one that lends to people in your situation. Good brokers can also shop with several lenders and ferret out the best interest rates.
How Mortgage Brokers Are Compensated
Who pays the broker? Either you, or the wholesaler, or both. Brokers can get a commission from the lender, called a rebate or yield spread premium (YSP). Or they can collect an origination fee from you (if you pay the origination yourself, you should get a lower interest rate).
YSP Isn’t Evil
YSPs have been somewhat demonized in the press, usually by writers who don’t understand them. Their premise is that if brokers receive rebates, then they aren’t providing the best mortgage rates. What is overlooked is the fact that brokers provide a service and someone–you or the wholesaler–is going to pay them for that service. About 85% of borrowers choose to have the wholesaler pay the broker even if it means getting a slightly higher interest rate.
So don’t worry about YSP–a study by the Federal Trade Commission found that when YSP was disclosed, borrowers became confused or suspicious and were less likely to choose the least expensive mortgage. When YSP was not disclosed, borrowers chose the cheapest loan 90% of the time. It’s not important if brokers get YSPs or not–by shopping carefully, reading your Good Faith Estimates, and choosing the best refinance rate, you won’t be taken advantage of.
What Are Mortgage Bankers?
Mortgage bankers are also called retail loan officers or mortgage finance officers. They usually work for only one company and sell only its loans. They are paid commissions by their employers, which are mortgage banks.
While mortgage bankers don’t have access to as many lenders and programs as mortgage brokers, they may be able to offer better pricing on the mortgages they sell. Often, larger banks have economies of scale that let them price their loans more competitively, and if you don’t have any special circumstances that make getting a loan approval tricky, they may be the best way to go. In addition, mortgage bankers aren’t sending your loan off to another lender. They have more control of the process and it may go faster. A mortgage banker is able to give you direct approval, while a broker is a middleman and has no connection with the institution lending the money.
Refinancing a Home: The Bottom Line
Ultimately, it matters less that your lender is a banker or broker than it does that your loan agent is a seasoned professional whose work style suits you. This person gets intimately involved with your finances and your life–he or she should be someone whose judgment and ethics inspire trust.
