The Difference Between Mortgage Brokers and Mortgage Bankers

Think of it this way: A retail store buys its merchandise wholesale from a distributor. The store then marks up the merchandise, and sells it at retail to Mr. And Mrs. Consumer. It's the same way with a mortgage broker. The broker establishes relationships with several wholesale lenders. These wholesale lenders have pricing that is below the rates you see published in the newspaper.

Mortgage brokers are some of the most creative people you will ever meet – they will come up with unbelievable ways to make money off you. Rarely, if ever, will they give you a no-cost loan. Brokers make their money in several ways: with front-end points, back-end points, and junk fees.

Front-end points are those that you see in advertising. They are often referred to as "discount points." The selling point here is that when you pay more points up-front, you "buy down" your interest rate. In other words, the more points you pay, the lower your interest rate. There can be some advantages to paying points. If you are buying a home, for example, the points you pay are generally tax-deductible (consult your tax advisor).

If you are planning to stay in your home for a long time, or do not plan on refinancing, the savings you encounter in the interest rate will offset the points you pay over the life of the loan, saving you money in the long-term. However, these points also go directly into the mortgage broker's pocket. He may have charged you a rate that you thought you "bought down," when in reality you already had a good rate and paid points for nothing.

For example, you might have a mortgage for $150,000 at 7.5% with 2 points. Those 2 points equals $3,000 out of your pocket and into the broker's. This is just for one loan. Multiply this by several loans per month, and you see why there are so many mortgage companies in the yellow pages.

Back-end points are fees paid to a mortgage broker from the wholesale lending institution. Usually, the higher the rate, the higher the back-end points. This is very tricky, because there are creative ways in which these fees are disguised in loan disclosures. Many mortgage brokers will hit you with a combination of both front and back-end points

Junk Fees are fees charged by brokers and/or lending institutions as an add-on to any standard fees you might pay. Usually, these fees are not tax-deductible. Junk fees can be placed under any of a number of guises on your settlement statement, including Processing Fees, Underwriting Fees, and Warehouse Fees.

Mortgage Banks


Mortgage Banks are like retail storefronts. Let's take a shopping mall, for example. A shopping mall is an establishment filled with nothing but retail stores. The store that you go into would depend on your needs. If you need shoes, you would go to a shoe store, and so on. Each store has its own specialty.

The same is true with mortgage banks. Some specialize in dealing with borrowers with perfect credit. Some specialize in dealing with those with problem credit. Some deal with a combination of both, and so on.

Herein lies the problem with banks. You can go to one, but if you don't fit into their criteria, you're pretty much out of luck. If you are lucky enough to be approved by a bank, you pretty much have to live with the rate you are given. There is little, if any, room for negotiation.

Mortgage banks not to be confused with a depository institution where you would keep your checking account. Mortgage Banks do not take deposits.

Regardless of which you use, they will have roughly the same guidelines for comparable mortgage products. Always make sure that you are on top of your credit scores before approaching either a bank or a broker. By doing so, you can go into the application process knowing what they know. Brokers, especially, will treat you with a little more care when you know your own credit situation.