Which is preferable ? the mortgage broker or the direct lender? The answer will vary depending on whom you ask. The broker touts a variety of sources and claims that this yields the most favorable loan terms. The lender says that the mortgage broker is just a middleman and if you go directly to the lender then you'll avoid paying broker fees. If you walk into a store that sells blue shoes, then I'm sure you'll hear that blue shoes are your color and if you walk into a red shoe store then, conversely, red shoes are more becoming. And as this author is typing, he is wondering whether you think he works at the red shoe store or blue. I'll tell you that I've worked at both and I'm not impartial; but, rather than giving you my opinion, I'll present some facts. Pay attention, ?cause the red shoe store charges too much.
Wholesale Access (wholesaleaccess.com) reports that mortgage brokers originated 68% of all mortgage loans in 2004. While this is certainly an impressive statistic - bigger does not always equate better. The real question is whether or not borrowers pay lower rates and fees on mortgages originated through brokers or on mortgages originated by direct lenders. The answer can be found in a study of data from (Q3) 1995 through (Q1) 2002. This data set was supplied by American Financial Services Association and is so encompassing that it accounted for approximately 40% of all subprime originations in 1998. The results are published in a 2004 paper titled Mortgage Brokers And The Subprime Market (ftc.gov/be/seminardocs/0405elliehausen.pdf). Please refer to the top of the first page, which effectually states that this paper can't be quoted. In compliance with this directive, I shall direct you to the conclusion on page ten of the document. The first sentence can be translated as (and I don't quote) - loans originated by mortgage brokers cost less than loans originated by the creditors. That difference was quantified (page 9) as 1.132% cost savings for those who used mortgage brokers on a first mortgage and 1.973% cost savings for those who utilized mortgage brokers on a second mortgage. There you have it! On average, it is cheaper to work with a mortgage broker than going directly to the lender; but there's still more to tell. Let's talk about these broker fees.
A broker by definition introduces buyers and sellers ? by all intents and purposes, yes a middleman. The misnomer in this equation is the fundamental difference between wholesale and retail. Take for example, a lender that is in one geographical area of the country and seeks diversification of its portfolio of mortgages through the origination of loans in another state. The lender has two choices. The first is to open a retail office in that state, hire staff, buy equipment, advertise and absorb all of the associated overhead as an expense to originate retail mortgage loans that he can ultimately service. The second option is for that lender to contract with a mortgage brokerage that incurs the expense of finding the client and also originates, processes and packages the loan for submission to that lender's wholesale department. With the second option, the lender forgoes the expenses listed above and is willing to offer the mortgage broker a wholesale price in return. The broker has this same type of wholesale relationship with numerous lenders and competition among the lenders drives prices down for the broker. Yes, the broker charges a rate or fee that is higher than its wholesale cost but (as the 2004 study reveals) that rate and fee combination is still considerably lower than the retail cost charged by direct lenders.
In conclusion, I hope this article has shed some light on the difference between wholesale/retail, brokers/lenders, and blue and red shoes. Just to recap: wholesale is better than retail, brokers are better than lenders, and there is compelling evidence to explain why 68% of us prefer blue shoes.
Copyright 2006 Paul Jerome
Today, the mortgage market has become more competitive, with a huge number of mortgage options to choose from. Fledgling companies, speculators, and private individuals have all realized the financial opportunities to be gained through loaning money for mortgages. As a result, mortgage brokers are becoming more visible.
A mortgage broker is a freelance agent. As opposed to the bank employee, who will only provide a mortgage that originates with the bank, a broker has the option of a very wide range of programs. It is her or his job to find the best rate possible for the client based on the client’s terms.
The choice of using a bank or a mortgage broker depends on your individual situation. For example, banks tend to have very strict guidelines when it comes to approving individuals who may not have the best credit. Individuals who have been bankrupt through a failed business or have other credit problems may be turned down by a bank. A mortgage broker, on the other hand, will usually be able to locate a mortgage lender who does not mind a bad credit rating. As always, of course, such a loan will mean a higher down payment and higher interest rates.
That is one situation where a mortgage broker may be beneficial, the other of course being the access to a wide range of mortgage plans, some of which are much more favourable to the home owner than traditional bank mortgages. On the other hand, there is a lot to be said for going through a bank.
A mortgage broker, although operating under governmental guidelines dictated by provinces (in Canada) is an individual, and that means some research will have to be done in order to ensure that you are receiving the best service. Banks of course have national reputations at stake and are unlikely to have any major skeletons in their closets, outside of the fact that they are pirates.
Banks also have the advantage of understanding local conditions; mortgage brokers usually will, but they may hook you up with a mortgage lender who is based far away and has less of a grasp on local conditions. This may affect the loan, but in most cases the mortgage brokers will have a grasp of local conditions and find a plan to work accordingly.
The decision to go with a bank or a broker for a mortgage will depend on the situation of the individual. If you like the idea of going outside the bank system and hunting for the best mortgage deal for you, a mortgage broker may be a good choice. If you like the straightforward, traditional approach, go through the loan officer at your bank.
Both Paul Jerome & Robert Parker are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Paul Jerome has sinced written about articles on various topics from Mind Power, Mortgage and Free Credit Report Score. Paul Jerome is a mortgage expert and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information regarding credit repair and responsible mortgage lending.. Paul Jerome's top article generates over 8100 views. to your Favourites.
Robert Parker has sinced written about articles on various topics from Real Estate, Home and Real Estate. If you are looking for someone who knows buying and selling trends, call a ReMax Professional. Experienced Oakville real estate agents can have yo. Robert Parker's top article generates over 8100 views. to your Favourites.