My mortgage refinance process is continuing. Here’s what happened in week 2 with a brief recap of week 1.
Week 1. Found a good rate at National Mortgage Alliance (NMA). Received quote on GFE. Filled out application online.
Monday 4/27/2009. Rate lock confirmed. 4.5% for 15-year fixed. Lender credit covers all closing cost. Escrow waiver is optional for a fee.
Tuesday 4/28/2009. Received the disclosure document package through a secure link online. Signed all the disclosures. Faxed back total 45 pages including these supporting documents:
- copy of driver’s license
- last year’s W-2
- 2 most recent pay stubs
- bank statement
- poof of homeowner’s insurance
Friday 5/1/2009. Loan advisor confirmed all the disclosure documents were properly executed.
My previous refinances were done through a mortgage broker. This time I’m doing it through a division of a bank. That makes it a mortgage lender, not a mortgage broker. What’s the difference between working with a mortgage broker versus working with a mortgage lender? None I can tell so far.
A mortgage broker arranges loans from other banks. They do not set lending standards or fund the loans. They are just a middleman introducing the borrower to a lender. A mortgage broker gets paid from making that introduction. I dug up the paperwork from my last no cost refi in 2008. Here’s how much the broker got paid:
| Lender paid to Broker | $5,434 | |
| Broker paid for | ||
| Title Insurance | $825 | |
| Lender fees | $830 | |
| Settlement Agent | $314 | |
| Credit Report | $38 | |
| Local government | $56 | |
| Total | $2,063 | |
| Broker Revenue | $3,371 |
The broker earned $3,371 from doing my refinance. That’s pretty good for taking some phone calls and forwarding some paperwork, isn’t it?
Was I duped? Could I have gone to the bank directly and saved $3,371?
Unfortunately, no. A mortgage broker sells loans like Amazon sells iPods. Apple, which makes iPods, also sells iPods directly to consumers in its own online store and retail stores. But the price from Apple’s online and retail stores is not any lower than the price at Amazon. Amazon’s price is actually a little less. Amazon buys at wholesale price from Apple and then sells at retail price to consumers. Apple’s own online store and retail stores also sells at retail price.
Going through a mortgage broker in itself does NOT necessarily mean the rate and fees will be higher than what one gets from going to a bank directly. For the bank, mortgage brokers are just a sales channel. The bank’s own web site and retail branches are also sales channels.
Of course not all brokers are created equal. There could be a broker who is satisfied with only $1,500 revenue and is willing to pass on to me more of the money he or she gets from the lender. There could be another broker who wants to keep the entire $5,434 to him- or herself.
Therefore you still have to know what the prevailing retail rate and fees are whether you shop for a mortgage. Whoever delivers the lowest rate and fees wins, regardless whether they are a mortgage broker or a mortgage lender. By shopping for a no cost refi, I eliminate one variable. I only look at the rate. As long as the rate is the best I can get elsewhere, I don’t mind letting the broker earn their fee. The broker lost out this time because he couldn’t match NMA’s rate.
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Charlotte Res says
I think your timing on the refi is perfect. I’m just starting the refi process myself.
Considering China and others are demanding a higher return on future t-note purchases, I think rates are only going up from here on out.
Charlotte Res says
I’d love to get your opinion on that article, btw.
Harry Sit says
Charlotte – I don’t have much to say about that New York Times article. All else being equal, issuing more debt and having more deficit will cause the interest rate to go up. I have no idea whether the US government’s debt or deficit reached a point where they start to have a meaningful impact on interest rate or exchange rate. Meanwhile we have a global recession and there are countries with larger debt load (relatively speaking) than the United States. I will root for lower rates in the future. Of course what I root for won’t matter anyway.
Charlotte Res says
Our largest-volume customer has just stopped buying because the return is too low. In order to sustain this insane gov spending, we’re going to have to re-attract T-note buyers. The only way to do that is to either lower the price of the bond even further (the Fed is currently repurchasing to try to lift it back up) or bring a stronger coupon by increasing the IR.
Anyway, what I’m trying to say is, people, if you still have an adjustable rate then you need to lock in these low fixed rates now. This time next year, especially if the equity markets are strong enough to take some bad news, we’ll be seeing higher rates.
Alice says
I was reading your out-line of events.
I only have few comments. You said that there was no difference between a lender and a broker until you found out how much the broker was paid for introducing you to the lender and that you could have saved the $3,371 by going directly to the lender.
Here is the fact. A broker does do a lot more than the introduction they also process the loan for you (they do all of the leg work so you don’t have to). The lender that they have introduced you to underwrites the loan to make sure that it meets the guide line and funds the loan.
When you go directly to the lender the pricing is different and they do not have to disclose how much they are being paid. In most cases, (not all) they are making just as much if not more than the broker.
A Brokers job is to find the best rate, program and to find the lender that will meet your needs. A lenders job is to see if you meet there expectations and tell you what rate and program you will get.
.
The Broker does not get to keep all of the funds they are divided with others who also work on the loan. This is the same when you go directly to the lender EXCEPT they do not have to pay outside people so they are getting more of your money.
So the only way you could see if you saved any money is to know how much the lender paid them selves to do your loan. This does not have to be disclosed to you because you went with a lender and not a broker.
I personally like to know how much I am paying for a service.
Alice says
I forgot one other thing. The Broker does not sell the loans the lenders do.
Harry Sit says
@Alice – Thank you for your detailed comments. We are not in disagreement. Perhaps you didn’t read my post closely. I said I could NOT have saved $3,371 had I gone to the bank directly.
When I said the broker sells loans, I meant figuratively from a consumer’s point of view, not literally. I understand the loan relationship is always between the lender and the borrower. I have another post coming up about this mortgage broker and mortgage lender business. Stay tuned.
Jeff Miller says
Several years ago, I was an “employed” loan officer with National City Mortgage, who also did business with brokers in the wholesale mortgage market. On two occasions, I received calls from couples who had received refinance offers from brokers, which they showed to me, assuming that by dealing directly with the lender they could “cut out the middle man” and save some money. Much to my surprise and theirs, I was not only unable to beat the brokers’ offers, I was unable to match them!
I asked my boss how this could possibly happen. He repled, “As our employee, we have to pay for your office, your phones, your support staff, your health insurance, matching 401k contributions, half of your Social Security and Medicare taxes, workers comp, and unemployment insurance. We pack those costs of employment into every loan you originate, and these costs are reflected in the rate sheets we give you to work from. Since we don’t have ANY of those costs associated with the brokers in the wholesale market, the rate sheets we give them reflect significantly better rates and pricing than the rate sheets we give you.” Soon after that, I quit to go back to being a broker, and refinanced my own home with National City at a better rate than I could have given myself when I worked for National City.
Usually, you can get a better deal from a broker than from a direct lender, but not always. This is especially true if you go to the lender servicing your current loan. They paid big bucks for the servicing rights, which they lose if you refiance, and they will have to pay up again to regain your servicing rights, which are far more profitable than what they make originating your refi.
Your current lender is the one lender on the planet that has no financial incentive to refinance your loan.