The Great Mortgage Debate: Banks vs. Mortgage Lenders
The “Corner Bank” Option
The choice between financing with banks or mortgage lenders (also known as correspondent lenders) has been the basis of a longstanding debate in the mortgage industry. In fact, the huge bank failures in 2008 – driven largely by mortgage defaults -- have added fuel to the already hot topic.
Nonetheless, many people feel more comfortable working with their local banks for new mortgages or refinancing. As existing customers, many have a familiarity with their banks, and they assume they'll be treated to better customer service, as well as favorable interest rates or reduced closing costs. It may in fact prove true, but not always.
Some banks will offer preferential rates and fees to their larger borrowers, high-balance depositors or multiple account holders – people who represent a large source of the bank's revenue. Whatever your status as a customer, it's always wise to see what if any incentives or preferable terms your bank is prepared to offer.
“Wholesale” Pricing at Mortgage firms
You'll often find, however, that interest rates are lower at mortgage companies. These providers are typically in a position to offer you interest rates at wholesale (i.e., better) prices. Why? Because when you finance your loan through a mortgage lender, you're not actually making your payments to that company.
The mortgage lender will initially fund the loan with their own money. Similar to mortgage banks, they'll process the applications, assess all credit risk, and verify the asset and employment information.
Unlike a bank, however, a mortgage lender doesn't keep the loan on its own books. The firm “shops” your mortgage among their investor partners and locks in the best wholesale price. They get their money (and profit) back relatively soon. By divesting themselves of the financial risk, mortgage lenders can thus afford to offer lower rates and costs.
Conversely a mortgage bank retains the financial risk, keeping the loan “in-house.” In order to protect themselves and stay in compliance with bank reserve requirements, they sell their mortgages at “retail” rates. As a result, bank mortgages may higher fees or interest rates.
Refinancing Your Mortgage
In addition to lower rates and fees, mortgage lenders are also often able to offer faster refinancing timelines vs. banks. When interest rates fall, a mortgage company is typically in a position to process the “refi” within 35-45 days.
Refinancing a mortgage through a bank could take 70 to 80 days or longer. By reselling the loan to their investors, mortgage lenders have the flexibility to compress the turnaround time for its customers.
The Ultimate Choice
Buying a home is among the most significant personal and financial events in a person's life. Financing any mortgage loan demands that you do your homework and fully weight the merits of buying from your local bank or mortgage lender. And finally, in addition to comparing rates and fees, you should determine which seller offers you the best service, a proven record of integrity, and the most peace of mind.[note color="#f7f692"]
Bob Boucher is Owner and Creative Director of Boucher Communications. In his 30 years as a communications professional, Bob has served as a marketing manager, creative director, copywriter and journalist. He speaks regularly on new trends in marketing and conducts training for people looking to grow their businesses through marketing and branding.[/note]