A mortgage lender is a mortgage lender, right?
If you’re talking about what happens at the closing, where the lender shows up with the cash you need to buy your home, then the answer is “yes.”
But dig a little deeper and it soon becomes clear that there’s a wide world of difference between different types of lenders. Knowing how mortgage brokers, mortgage bankers, and other types of lenders operate can help you make a smart move with your money.
A mortgage broker is typically works with a number of different end lenders, also called “investors” in the secondary mortgage market. They represent different companies that are looking to invest cash in a mortgage, including banks, S&Ls, institutional investors (like a teacher’s pension fund), a hedge fund, or even Fannie Mae and Freddie Mac, which are the largest players in the secondary mortgage market.
Some mortgage brokers represent as many as 100 different investors, although most represent a dozen or so. Each investor might offer 10 to 20 different loan programs, which is why some mortgage brokers seem to have an infinite number of loans from which you can choose.
Often, mortgage brokers will work directly with buyers or homeowners on their purchase or refinance mortgages, or they’ll have a staff of loan officers who can take loan applications, process the papers, and submit the files to their investors.
The investors provide the funding for your mortgage, pay the mortgage broker a fee for setting up the deal, and close on the loan.
Today’s mortgage bankers also do a lot of what mortgage brokers do: They often have investors ready to buy their loans after they close.
But mortgage bankers will also use their own money to fund your loan at the closing. Mortgage bankers might often keep these loans in their own investment portfolio (which is why they’re often called “portfolio loans”) rather than selling them off on the secondary mortgage market.
If they keep the loans, rather than selling them, then your lender will also service your loan, collect your payments each month, credit your account, and make sure your real estate taxes and insurance premiums are paid from your real estate and tax escrow account (if you have them).
Later on, the lender might decide to sell loan to another investor.
Is it better to use a mortgage broker or banker to get your loan? The honest answer is it doesn’t really matter. You should select your mortgage lender based on experience, customer service, and positive recommendations from people you trust.
The only thing you shouldn’t do is choose a lender who offers you the lowest rates. Interest rates are extremely important, but the open nature of today’s mortgage market means that competition will natural keep prices as low as possible.
A good mortgage broker or banker will offer interest rates and loan programs that are competitive. The only place you’ll get a truly cheaper deal is if you go to a credit union (you must belong to one or join one in order to qualify for their loan programs). That’s because credit unions don’t need to make as much money as other for-profit organizations, so they can afford to charge less for the loans.
In general, all mortgage companies generally choose from the same pool of institutional investors. A company offering an interest rate that is substantially below everyone else’s might be making up the difference by increasing closing costs or tacking on additional settlement fees.
Of course, if a company is offering a total mortgage package that’s well below current market rates, beware. Remember, if it sounds too good to be true, it probably is.
Published: Oct 21, 2006