If you thought that when it comes to a mortgage, all you have to do is find the lender with the best interest rate, think again.
"Asking what the interest rate and fees are is a good starting point, because you want to know that the rate is very competitive. If it's not, you walk away. But it shouldn't stop there," says Jim Duffy, a mortgage banker with Cole Taylor Mortgage.
He says many other factors have to be considered. For starters, are you buying a home or refinancing your current home? That could affect whether you should use an online or face-to-face lender, says Duffy.
So for more detail about the advantages and disadvantages of the various types of mortgage lenders, read on; it could save you more than you think.
Lender Type #1: National Banks
These are the big names in banking that everyone knows: Wells Fargo, Bank of America, etc., as well as many other institutions that make their own mortgage loans and service them - i.e., collect the monthly payments.
Possible Advantages: National banks have the luxury of making their own guidelines for underwriting loans, and, says Duffy, are generally very competitive on interest rates and fees because they don't have third-party commissions (like brokers) to pay.
Also, if you are already a customer, they might offer an incentive like a higher interest rate in your savings or checking account if you use them for your home mortgage, says Duffy.
Possible Disadvantages: National banks are big. Really big. And that could mean a lack of understanding of the nuances from region to region, says Duffy. "A homebuyer would really want to meet the local loan officer and see who they're comfortable with and the professionalism of that person. Because the national bank is only as good as the person they're dealing with," says Duffy.
Lender Type #2: Direct Lenders
Direct lenders act just like the big banks - and often are affiliated with national banks, says Duffy. He says they also have the freedom to make their own mortgage-qualifying guidelines, and have very competitive rates and fees.
Possible Advantages: Some direct lenders, says Duffy, offer all the attributes of big banks with the added benefit of "acting small," with a personal touch.
And again, says Duffy, who himself works for a national direct lender, because there is no third-party involved, they will likely have very competitive rates and fees.
Possible Disadvantages: If your particular situation is not acceptable to their guidelines, you may not qualify for a mortgage through them.
For example, says Duffy, if you have special circumstances, such as a property that is undergoing massive renovations - you may need to find a niche lender.
Lender Type #3: Credit Unions
If you bank or have a credit card or car loan with a credit union - which by definition is structured to operate as a not-for-profit organization in order to give its customer-members better service - it might make sense to start your mortgage search there, says Duffy.
Possible Advantages: "A credit union is a good option for someone who already banks and perhaps has a car loan and/or credit card with the credit union because there's at least a possibility that they can save on one or another of their other services by doing their mortgage with the credit union as well," says Duffy.
The savings might come in the form of lower fees on the mortgage, a lower credit card interest rate, or a higher interest rate on the customer's savings or money market account, says Duffy.
Possible Disadvantages: Most credit unions are correspondent lenders, says Duffy. In other words, they offer the service of helping you get a mortgage, but they are not the lender. Therefore, they are going by another lender's guidelines.
"That means they might not have the flexibility you need," says Duffy. That's because they are restricted to the underwriting policies of the lender that they are affiliated with, he says.
Lender Type #4: Online Lenders
In the age of the Internet, everything is just an easy mouse click away, right? Well, maybe. Getting your mortgage or refinancing online can certainly work out swimmingly for the right people, says Duffy. So here are a few tips:
Possible Advantages: "Generally speaking," says Duffy, "someone refinancing as opposed to buying is a better fit for online mortgage lenders, because [online mortgage lenders] make the process somewhat simple and streamlined."
He says that refinances are often easier than sales, documentation and logistics-wise, so an online situation could make sense. It can save you time and money with competitive rates and fees, and simple, straightforward paperwork.
Possible Disadvantages: "Because [online lenders] are not local, they may not necessarily know the nuances for making a smooth, on-time closing for a purchase," says Duffy.
So, he says that if someone is buying on a short time frame, it may make sense to go with a local lender who you can sit down face-to-face with. This way, Duffy says, any special issues specific to your situation - a unique property, qualifying hurdles, or an unforeseen issue that comes up during the process - can be handled immediately.
Lender Type #5: Mortgage Brokers
It's true, technically speaking, that mortgage brokers are not lenders. However, because they are so prevalent, they should be covered. Mortgage brokers are basically middle men who have the ability to work with many lenders. They help you complete the paperwork and find a mortgage that is right for you.
Possible Advantages: Since mortgage lenders do not work with only one lender, they can shop around for the best loan for your circumstances, says Duffy.
"The broker has a place," says Duffy, "especially if you have a very unique situation and not every lender will lend to you. A broker will find a niche lender, so you don't have to do all the work in finding the lender who has the product for your situation." That can save you a lot of time and hassle, he says.
Possible Disadvantages: Because the broker represents an extra link in the mortgage chain, it could end up costing you more in fees, says Duffy.
"If someone goes to a mortgage broker, that broker is doing the up-front work and getting paid for that, but then it passes over to a direct lender, who is also collecting fees and making a profit. There's at least two parties involved in a broker situation, where there's really only one in a direct lender situation," says Duffy.
- mortgage brokers
- interest rate
- National Banks