Want the best mortgage rates? It really is easy to find them as long as you know what to look for and what questions to ask. In this series of articles I describe what is necessary to get the best rate, costs and terms for your home loan. We will start out with some necessary understanding of the mortgage market and go deeper with each article. I hope you enjoy this series.
I know that many of us tend to think the mortgage industry is too complicated, but it’s not; as we explore each topic, you will see how simple the process is. This series will continue to grow based on its natural course and the feedback received.
A key point to realize is that there are many different places to choose from but very few suppliers. Think of it like this. If you want a cola, you can go to hundreds of different types of stores to buy your cola, however, you only have a few choices that are the same at each place – Coke, Pepsi, and Royal Crown (RC). The mortgage industry is very similar to this. Thanks to our government’s continuing effort to legislate the banking industry, most of the money that is lent in the mortgage process comes from a few of the biggest players that have the backing of the Federal Reserve.
Step one – Know what type of lenders there are. There are many different types of lenders to choose from. Each one has a different business model and very different corporate personalities.
- Federal and State Banks – These are the lenders that control the market. They are, for example, the ones that created the sub-prime mortgage loan market. They generally have the best corner locations in your neighborhood. They also have the most direct route for obtaining funds that are used for lending on mortgage loans. They also have the highest fixed cost structure.
- Credit Unions – A credit union is essentially a non-profit financial institution that is owned by its depositors. To be a member you must have a connection or common bond with the group the credit union serves. Examples are: place of work, geographic area, school, place of worship or membership organization.
- Mortgage Bank – A mortgage bank is a lender that is licensed by the state to originate mortgage loans. They typically have a line of credit called a warehouse line that is used to lend money. Once a mortgage loan is closed, a mortgage bank will sell the loan to pay off its warehouse line. The loan can be sold to entities like Fannie Mae and Freddie Mac or to larger lenders, usually Federal Banks that will in turn sell the loans again.
- Broker – A mortgage broker is a lender that will work with the other types of lenders to offer mortgage loans. A mortgage broker generally has the greatest access to loan products and varying rates as well as the lowest fixed cost structure. Mortgage brokers do not approve loans, nor do they lend their own funds or use a warehouse line. They are simply a conduit to the other lenders.
In an active mortgage market, all of the above participants are necessary to keep the mortgage system functioning well. When all participants are active and healthy, there is a healthy tension between them, which helps to keep rates and costs low while quality service and speed of service high. Right now the lending industry is not healthy. Government reaction to the mortgage foreclosure mess has had a negative effect on two of the four major types of lenders. The direct result of this has been reduced competition and increase in interest rates and fees.
In general all of the types of lenders we just covered above have the ability to offer the same types of loans with the same types of fees or costs. What separates them the most is their individual business model and culture, which we will cover next week as our series continues.
Remember to subscribe to our daily email so you don’t miss out on future articles of the “How to Get the Lowest Mortgage Rates and Fees” series, some of the topics we will cover are how a loan officer affects your rate and fees, the difference between closing costs and pre-paids, what disclosures or documents to insist on receiving so you can accurately compare costs and much more. I appreciate your comments below…
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