With so many choices available today for consumers who want to obtain home financing, it may be helpful to compare and contrast mortgage brokers and banks from a mortgage perspective.
There are three main differences:
1) How many lenders each works with
2) How the loans are funded
3) How each are compensated
Mortgage brokers connect lenders and borrowers. They can and usually do work with many lenders. This gives borrowers a range of choices because brokers can select the best product and terms for their clients.
Another difference is how the loan is funded, or how the money gets to the borrower. At closing, a broker will request funds from the lender, who will send them electronically, but the broker never holds the funds. A bank will deliver the loan directly out of its own funds, from what is called a warehouse line.
The broker gets paid by the lender in the form of what is called a Yield Spread Premium (YSP), or fee for finding and processing the borrower. Brokers by law must disclose the YSP to the borrower; banks, if they charge one, are exempt from having to disclose the YSP.
The higher the interest rate, the higher the Yield Spread paid to the broker. Brokers stay competitive by keeping the YSP and the rate low.
Brokers, if needed, are able to charge a slightly higher rate and then refund a portion of the YSP back to borrowers in the form of a broker credit toward closing costs. This assists borrowers who would otherwise be lacking in the funds to pay closing costs.