Refinancing a home mortgage may be an excellent way to consolidate your monthly expenses, save money and capture a competitive interest rate that may not have been available to you previously. When it comes time to refinance a home mortgage, the owners of the property typically have two options available to them: consult with the bank overseeing their mortgage, or seek the assistance of a mortgage broker.
Generally speaking, the primary job of a mortgage broker is to secure the best possible borrowing terms through ongoing discussions with a variety of lenders. If you have the time and interest required to explore all of your mortgage options, a mortgage broker might be the best possible solution for you.
Choosing between a mortgage broker and bank for your home refinancing will likely be influenced by a diverse set of variables. Whereas individuals with an excellent financial history may receive competitive refinancing terms without the help of a broker, those who do have less pristine credit history may be able to secure better loan options through the help of a broker.
The Role of the Mortgage Broker
Although banks typically provide mortgage lending services directly to consumers, a mortgage broker can act as a middleman between the current/future homeowner and these lenders. In doing so, the broker creates a pathway toward a constructive conversation between the lender and the borrower which, in turn, could result in more favorable terms for the borrower.
Mortgage brokers typically work on behalf of both individuals as well as businesses. After careful consultation with the borrower, the broker communicates directly with lenders in order to assess whether or not they are interested in offering a specific package to the borrower based exclusively on their current needs and financial health.
Because of the significant impact that these individuals can make on home sales and home refinancing, mortgage brokers are typically subject to a level of regulatory oversight by state and local agencies.
How Home Refinance Brokers Operate
In order to ensure that they are able to serve their clients as best as possible, a mortgage broker will typically undertake an extensive review of the prospective buyer or refinancer's financial history. This will often include requesting a full credit report, as well as exploring available documentation of income in order to ensure that the client will be able to comfortably afford the mortgage that is being sought.
The mortgage broker will seek out a pre-approval from a lender based upon the needs and background of their client. This is also referred to as a "lender's agreement" or "loan agreement." In the event that the potential lender agrees to the terms outlined by the broker, they will likely request all of the documentation mentioned previously related to the financial status of the applicant. Assuming this information satisfies their needs, the borrower will likely be confirmed for the mortgage in question.
Because the brokerage process involves extensive negotiation and real-world bargaining, it is not uncommon for brokers to secure mortgage loans with interest rates far better than those found on the mortgages provided by banks. This will typically hold true both for new mortgage applications as well as applications to refinance a property. Although the mortgage brokerage process may require more time than simply accepting the offer provided by a major bank, it is possible that this method of securing refinancing could be more favorable over the long term.
Comparing Your Options
For many individuals, the choice between using traditional bank lending and a mortgage broker is heavily influenced by their own personal finances. In a situation where an individual has strong financial credentials and a superb credit score, the rates offered to them by banks may already be some of the most competitive available. Given the fact that mortgages are a money-making enterprise for banks, these financial institutions will likely go above and beyond in order to attract the best class of borrowers. Therefore, if you already have a superb financial profile, you may discover that a mortgage broker can do little to improve the pre-existing borrowing offers already available to you.
The situation may change, however, if you currently have any blemishes in your financial history, ranging from a mediocre credit score to a history of missed payments. In a situation such as this, a mortgage broker could be particularly beneficial. The individual attention offered by a broker will allow you to create a borrowing proposal matched to your specific situation, which banks can look at and evaluate.
Whereas in some situations an individual facing some financial hurdles may be flatly rejected by a lending institution, a mortgage broker can help frame your situation in such a way as to enhance your credibility and successfully argue for your suitability as a borrower. Given the fact that mortgage brokers are often in touch with a diverse array of lending institutions, the chances are good that you will be able to find some specific bank that is willing to accept your borrowing proposal and deliver the necessary funds to you.
More Details About Mortgage Brokers
If you have decided to begin collaboration with a mortgage broker, there are some specific details you should be aware of, if only to ensure that you have all of the information you need to secure your funds. Of primary importance to the borrower should be how their broker is getting paid for their efforts. Generally speaking, mortgage brokers will either receive a commission from the lenders (banks) themselves or directly from the borrower. Of the two scenarios, the former is significantly more common than the latter.
Because mortgage brokers receive this commission from lending institutions, some borrowers may feel that the advice they are receiving for the broker may not be in their best interest, but rather, in the best interests of the broker themselves. This can be a troubling situation for some individuals, particularly those who may be working with a new broker for the first time and have yet to build the necessary rapport.
It is also important to note that mortgage brokers, like any professional service, are invested in reaping the greatest possible profits for themselves as possible. This means that the specific broker you have chosen to work with may also be accommodating the needs of several other clients simultaneously. In a situation where your particular mortgage requests may net the broker a smaller commission fee than one of their other clients, the possibility always exists that your service may suffer. This does not mean to imply that this scenario will always occur, but rather that it is a possibility.
Refinance With a Bank or Mortgage Broker
Given the fact that your mortgage refinancing is very important with respect to your personal finances and long-term property ownership, you should also consider the fact that any delay in this process due to administrative error could have large consequences. In the event that a member of a bank makes a mistake on your mortgage paperwork, this can be corrected relatively quickly given the fact that the documentation is already in the hands of the mortgage lender. However, if your mortgage broker makes a mistake when completing your loan paperwork and filing it with a bank, this could create a more noticeable problem.
If your paperwork must be sent back to you for revisions or to clarify any issue, you may notice a significant delay in your application processing time, which could also affect the interest rates you receive during refinancing.
It is also important to remember that your choice to enlist the help of a mortgage broker means that your borrowing terms are now in the hands of this particular individual. Brokering the best possible borrowing terms is a demanding skill born out of years of experience and know-how. Just because the broker you are working with is fully licensed does not mean that they have the necessary experience and skill to actually find the perfect loan for you. In some situations, a less-skilled mortgage broker may actually find borrowing terms that are inferior to a bank that would have granted you the necessary financing.
With that in mind, it is imperative that you do your own research before committing to a specific mortgage broker. Fortunately, the internet is filled with review websites and forums which can help you learn more about potential brokerage services you are exploring.
Moving Forward With Your Refinancing
If you are still unsure as to what your next step should be regarding refinancing, it may be in your best interest to consult directly with a financial expert or refinancing adviser. These individuals can provide additional, highly valuable perspectives and help ensure that you have the information you need to make a decision that truly feels right for you.
It is important to remember that, irrespective of which option you choose, your credit history and financial health will play a prominent role in determining the terms of your borrowing. Do not make the false assumption that a mortgage broker will be able to "erase" any negative elements of your financial profile during the mortgage negotiation process. Approaching a broker with a healthy set of expectations will allow you to better discuss your options and ensure that you leave the process feeling satisfied all the way around.
Further Research and Comparisons
Finally, be sure to explore what, if any, lender fees are attached to your loan if you enlist the aid of a mortgage broker. Lender fees are a discretionary element of mortgage brokerage that can fluctuate significantly depending upon the specific broker in question. "Hidden" fees such as these could make your borrowing offer feel significantly less advantageous once they have all been properly accounted for. As with any business, it is in your best interest to be as well-versed as possible in the product or service they are providing before committing to it financially.
Even if you are adamant about using a mortgage broker, it might still be in your best interest to consult with your preferred bank as well, if only to have a competing quote that will allow for an effective comparison between the two offers. Your bank may also have some degree of negotiable leeway which they can use to ensure that you receive the best possible borrowing terms as quickly and easily as possible.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.