I often get asked, “Why should I use a mortgage broker versus going to my local bank or going through the internet?“ The latter part of the question is the easy one to answer. Unless it is a major well-known company, you are taking a big risk. Yes, I am in a way hurting myself by making that comment because Knightlines is not a major well-known company on the national level, but that has also never been our goal. In our local market, we are well-known. The risk you run is that you are giving out all your personal information (social security, bank accounts, etc.) to an unknown.
I can go on about the internet, but this post is going to focus more on the difference between broker and banker (Please note that I am not saying mortgage banker because that is a separate issue). The way I always relate the two is like this: A mortgage broker offers his/her rates at wholesale, and the bank offers its rates at retail. And then I go on…
Think of the mortgage broker as a wholesale warehouse like SAMS, COSTCO, or BJS. And think of the bank as your local grocery store. When you go to one of the “clubs,” you get more for you dollar. At a per unit price, you are spending less money than the local grocery store. Think of this as the interest rate. Dollar for dollar you will spend less at the club for the same amount of product then at the local store. Over the term of your loan, the lower interest rate offers the more savings in money.
Now there is a trade off at shopping at one of the “clubs”: a membership fee. In order to save money, you have spend a little money. It seems oxymoronic, but it is true. Let’s say the club membership is $100/year. And in that year, you have done all your major shopping at the club and saved on average $100/month. At the end of the year, you are ahead $1100 from your initial investment. The same is true with mortgage brokers. We charge a fee for our services and for you to get the wholesale rate. Yes, our fee may seem high at first, but spread out the monthly saving in interest over the term of the loan… YOU SAVE MONEY.
To give an example on this, let’s use a loan amount of $100,000. The broker fee is 1% of the loan amount (or $1000). The broker offers a rate of 4.75% and the bank offers 5%. The difference in these two payments is $20/month. In 50 months (just over 4 years), the broker fee is paid in full by monthly savings. Over the remaining term of the loan, the borrower will save over $6000. And the larger the spread on the interest rate, the more the savings.
I do need to throw out this word of advice on mortgage brokers… “BEWARE OF THE HIDDEN FEE.” Some brokers will mark up the interest rate to get paid what is known as Yield Spread Premium (YSP). Thanks to recent legislation, brokers are now required to disclose this fee prior to closing. But there is a problem with this: the broker has to disclose the fee within 3 days of knowing the YSP but no less than 3 days prior to closing. The broker knows the final YSP only after the rate has been locked. What this means is that you may not have gotten the best rate at the time of rate lock. To read more about this topic, click here.
And one last big difference between banks and brokers. Banks only offer their loans based on their guidelines. Brokers can offer loans from various lenders with various guidelines. This gives you, the borrower, a more favorable chance of finding the right mortgage to meet your needs.
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