It's convenient to walk into your bank and ask for a mortgage, but the odds of getting the best deal available are against you. Mortgage lending and retail banking are two very different businesses, and doing either well takes a unique skill set. Unless you need a special type of loan, shopping around is almost always the best idea.
Some banks are better at doing mortgages than others. If your bank is one that doesn't make mortgage loans, it may not have the volume to justify having top-notch mortgage staff or to have the economies of scale to offer competitive pricing. You might not even be borrowing money from your bank, if your bank doesn't do mortgage loans.
Wholesale vs. Retail
When you bank with a major bank that also does a lot of mortgages, you might be tempted to work directly with it and bypass a broker's markup. However, these banks have two different pricing pools. They offer lower, wholesale pricing to brokers since the brokers do the work of finding the customer and packaging the loan. When you borrow directly from them, you pay a higher direct rate that covers the cost of the bank's sales staff.
Lack of Competition
When you walk into your bank and ask for a mortgage, you can't be sure that you're getting the best deal. Sometimes, your bank will be best. Sometimes, it won't. Lenders have different standards, and your particular situation might not match up with your bank's model of a perfect customer, while you would with another program. Since rates can vary by a percentage point between the best and worst lenders for you, shopping around is wise.
When Banks are Best
Sometimes, your bank will give you a discount on your closing costs or your interest rate if you already have a relationship with it. Also, if you need a special mortgage, like a super-jumbo loan over $1 million, you might find that a bank that already knows you is more likely to lend to you. According to the Wall Street Journal's MoneyWatch, one major national lender did almost 90 percent of its jumbo mortgage business with existing bank customers.
Even if your bank offers you the best rate and terms of any of the mortgage lenders that you talk to, the "right of setoff" might make it not the best place to get a mortgage. If something goes wrong and you aren't able to pay your mortgage with the bank, the right of setoff lets it take the money for your payment right out of any accounts that you have with it. In essence, your deposits with the bank are treated as if you're lending the bank money and, if you don't make your payments to it, it doesn't have to make its payments to you. You can protect yourself from this by simply keeping your money at another bank, as long as you aren't violating any agreements that you have with the bank that makes the mortgage.
- Bank of America: Platinum Privileges - Special Relationship Benefits on Home Loans
- The Schreiber Law Firm, LLC: The Bank's Right of Setoff and How it Affects You
- MarketWatch: The Year of the Jumbo, Jumbo Mortgage
- The Mortgage Professor: Mortgage Lenders, Mortgage Brokers & Loan Officers
- The Wall Street Journal: Getting the Best Refinancing Deal
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.