A staggering 84% of Americans — that’s how many say that buying a house has become a top priority. That’s 9% more Americans who said the same thing back in 2018!
If you’re one of these people, now is the best time to start planning for your home purchase. The sooner you get your finances in order, the sooner you can move into your dream home.
If you’re like most buyers though, you’d likely need to take out a mortgage loan to finance your home purchase. In this case, you have two options: apply for a bank loan or work with mortgage brokers.
The question now is, what’s the difference between the two? Which one should you choose and what exactly makes them a better choice over the other?
We’ll address all these burning questions in this post, so be sure to read on!
Who Are Mortgage Brokers?
Mortgage brokers are also known as home loan brokers. They act as “middlemen” between a borrower and a mortgage lender. Their job is to connect a home loan borrower to institutions that do mortgage lending.
Their network, however, isn’t limited to a single bank — they work with many types of lenders outside of banks. Either way, their network consists mostly of well-established, financially-stable lending institutions.
Also, mortgage brokers carry licenses, as they work in a regulated industry. This goes for many countries, including the United States. So, you don’t need to worry, so long as you do your research and do a license check before hiring a broker.
What Else Can a Mortgage Broker Do for You?
A mortgage broker will help you find lenders with offers that best suit your situation. They’ll connect you to banks and private lenders that have the best interest rate deals.
This is especially helpful if you don’t have an excellent credit score. Even a “good” FICO score, which is what 21% of US consumers have, won’t guarantee you the best home loan deal right away. You’d need to search farther and wider to find more competitive rates.
Mortgage brokers will ease much of that pain and effort. Plus, they’ll do much of the legwork in terms of organizing and processing documents.
Their job also includes verifying your employment and income sources. They’ll also pull your credit history to help them choose loan offers you’re likely to qualify for.
Once they have all these essential documents and data, they’ll apply for the loan on your behalf. Yes, they’ll send in your applications to multiple lenders at the same time.
Note, however, that mortgage brokers won’t be the ones to fund the loan. Their job is to help you find the financer of that loan, such as a bank.
So, How Then Do They Differ From Banks?
Banks do the actual lending. They fund the mortgage loan and they’re also that one that controls the interest rate. They set the loan’s terms and conditions and decide who gets to qualify for their products.
That said, if you take out a home loan from a bank, it’s the bank that you get into a long-term contract with.
Speaking of which, you can apply and take out a mortgage loan straight from a bank. In doing so, however, you’ll limit your choices to a single bank with a few offers.
Paying Up: How Do Mortgage Brokers Make Money?
As for how much do brokers make, this depends on a pre-agreement or who you’ll get the loan from.
Let’s say you qualify for a bigger mortgage loan from a large bank. Part of the interest payments you’ll make may go to the broker as the payment for their service. In many cases, the lender and the broker will work this out together.
If you take out a smaller loan or a mortgage with a lower interest, the broker’s fee may be in the form of a commission. The borrowers themselves can work this out with the broker. Don’t worry, as it’s only a small percentage of the loan amount, usually between 1% and 2%.
What About Banks?
Banks make money off of mortgage loans through the interest rate they charge. For instance, as of April 2020, the average interest rate of a 30-year fixed-rate mortgage sits at 3.33%. This 3.33% will go toward paying the lender in exchange for their service of lending you money.
Let’s break this down a little bit more.
Say you’ll take out a 30-year fixed-rate home loan amounting to $150,000. Multiply the base interest rate of 3.33% (0.0333) to that, and you get $4,995. This $4,995 is the base amount of interest payment you’ll make towards the lender.
That’s on top of the $150,000 you’ll have to pay back over the course of 30 years. So, the minimum amount you’ll owe the lender is $154,995. Keep in mind that this is only the base repayment amount, as it doesn’t include all other applicable fees.
Which One Should You Choose?
If you’ve been a good long-term customer of a certain bank, they may offer you a nice deal on a home loan. Most banks do this to “repay” their clients’ patronage and keep them loyal.
In this case, your own bank is a good place to start shopping around for a mortgage loan. It’s only a starting point though, as it’s always best to compare your options. Even a small 0.05% interest rate difference can already save you hundreds of dollars in the long run.
This is why you should also consider working with a mortgage broker. A home loan broker will make it easier and quicker to locate loan offers that best suit your situation. Since they’ll only look for competitive rates, they can already save you quite a lot of money.
They will also save you a lot of time, which is ideal if you want to buy a home as soon as possible.
Make the Best Choice Now to Start Living the Life of A Home Owner
There you have it, everything you need to know about banks and mortgage brokers. Now that you know how they work and what they can do for you, you can make a more educated choice. Either way, don’t forget to compare banks and brokers (as well as their fees) before you make your decision.
Ready for more life pro tips that’ll help make you a better homeowner? Then don’t forget to head over to this site’s Home Sweet Home section then!