Mortgage Broker vs. Mortgage Banker

By: Emily Ferreira, Managing Editor

For many prospective homeowners, the terms MORTGAGE BROKER and MORTGAGE BANKER became rolled up into a single idea, because they look and sound quite similar. Used interchangeably, they come to mean something like "the person who gives me the loan." But, this is highly ambiguous. Is it the person who finally disburses the funds? Or is it the guy who arranges the deal? In approximately 80% of mortgage loans in the U.S., these represent two independent agencies, so the difference is important.

In the beginning, was the mortgage banker. He advertised, negotiated, processed the contract, and finally, disbursed the loan. Seeing that money was being made, more and more mortgage bankers appeared, offering various loan sizes and rates and requiring different standards of credit and collateral. These were one-stop shops.

When the mortgage bankers had grown thick across the country, each with its own loan sizes, rates, credit and collateral requirements, the mortgage broker appeared. He was an expert who knew where to get what rate and what size loan. He knew which bankers would be willing to lend to you based on your credit and the value of your property. Because he knew all of this, he could save you a lot of time and a lot of money.

The situation has not changed. Rather than researching all of the different mortgage bankers themselves, most prospective homeowners hire a broker. Not only does the homeowner save time this way, he also ensures that he is getting the best loan deal, which in part includes the best mortgage rate for his credit and the value of his property. Realistically, a prospective homeowner could spend years researching the various mortgage bankers and still not find the best overall deal.

In addition to finding the best rate for one's credit and property value, a prospective homeowner must decide amongst a seemingly endless list of loan options and configurations. Will the mortgage be a fixed-rate or adjustable mortgage? Will it be repayment or interest-only? If adjustable, will the loan be standard variable? Standard variable with cashback? Discounted rate? Tracker rate? Will the loan be capped or collared, and if so, by what interval? And this isn't even the fine print.

A mortgage broker knows exactly what all of this means, and his expertise is the surest way for a homeowner to make the right decision about his mortgage. And, when one is dealing with six or more figures over a repayment period of thirty or more years, the difference between a good decision and the right decision can be very costly indeed.

With the distinction between banker and broker clearly in mind, it may be helpful now to consider a breakdown of the advantages of working directly with a banker or hiring a mortgage broker.

Reasons Many People Prefer Dealing Directly With A Mortgage Banker:

1) Personal relationships. If the homeowner knows his banker personally, he may feel a sense of security by continuing to transact all deals with him or her.

2) Avoid broker fees. Because the transaction is just between the homeowner and the lender, there are no broker fees associated with the transaction.

3) Local banking. By taking out a mortgage with a local bank, the homeowner can conduct all future transactions locally.

Reasons Why Other People Prefer Dealing With A Mortgage Broker:

Saves time:

1) Research time. Instead of the homeowner researching the rates, loan size offerings, credit and property value requirements of many different lenders, the broker already knows which banker will be the best match for the homeowner's particular needs.

2) Processing time. Instead of the homeowner having to talk to the front desk and waiting for the loan agents to negotiate with the loan manager, the broker has a direct line to the loan manager and can close the deal in a matter of minutes.

Saves money:

1) Best rate. The broker will find the best rate from among many bankers, saving thousands, even tens of thousands, over the repayment period.

2) Avoid fees. The broker knows how to avoid unnecessary lending fees.

By now, the distinction between a mortgage banker and a mortgage broker should be clear. But the decision to hire or not to hire a broker will still require careful consideration. The advantages of each alternative should be deliberately weighed, taking into account both the financial and the less tangible factors.

As far as the financial consideration goes, it may help to consider the following inequality. If the broker's service fee is less than the total amount he can save you in terms of the loan rate and the avoidance of lending fees, then hiring him is a sound financial decision. If, however, the service fee is in excess of the amount he can save you, then not hiring is the wiser. Of course, calculating all the fees and rates is a daunting endeavor, and while not exactly hidden, some lending fees are hard-to-recognize until after the deal is done.