June 11, 2018

A Dirty Secret for Finding the Best Mortgage Rate

When I purchased my first house in 2005, I  I walked into my bank – the same bank where I had kept my checking & savings accounts for years – and talked to their mortgage division.  It was a bank I was happy with.  It was a big bank.  It seemed to be the logical thing to do, and it’s what 90% of home buyers do.

And it’s the exact WRONG thing to do.

Look, shopping for a mortgage across multiple lenders always makes sense, and if your primary bank is one of them, that’s no problem.  But most people go to their primary bank first, and then they do not check rates anywhere else.  Just look at the stats.

Top 3 Largest US Banks by Assets

1. Chase – $2.53 trillion
2. Bank of America – $2.28 trillion
3. Wells Fargo – $1.95 trillion

Ok, so those are some massive banks.  And I’m sure they do checking, savings, certificates of deposits, wealth management, and a host of other services really well.  But mortgages are a bit of a different beast.  It requires a personal touch.  Real-estate is local, so mortgages are local, and local banks have an upper-hand in the sense that they know the market and can be more competitive.  On top of this, you have many “non-banks” who are mortgage wholesalers and can do things banks cannot.  This is why 5 of the top 10 mortgage originators in the U.S. are not banks at all.

So with all this in mind, you wouldn’t necessarily expect the biggest banks to be the biggest mortgage lenders, too?   Right? Wrong.

Top 5 Largest Morgage Originators by Originations

1. Quicken Loans – 5.7% market share
2. Wells Fargo – 5.2% market share
3. Chase – 2.3% market share
4. Bank of America – 2% market share
5. Freedom Mortgage – 2% market share

So even with all the “non-bank” mortgage companies who do ONLY mortgages (and clearly do it well, given Quicken’s place as the #1 mortgage originator) and all the local banks and all the local mortgage brokers, the top 3 largest banks are still all within the top 5 largest mortgage originators.  Why?  Because when we need a mortgage, most of us go straight to the bank that has our checking account.

Let me tell you why this doesn’t make sense.

First, the big banks are much slower & less flexible when it comes to a mortgage.  Debt-to-income ratios, lumpy income & negative credit events all can throw a wrench into their systems REAL quick.  You may make good money, but if it’s sporadic – like that of a sales person – and last year wasn’t a big one, you could be in trouble.  I had a mortgage denied once because owned 20% of a company that had negative income, and they offset this against my personal income.  Nevermind the fact that I wasn’t personally liable for any of the company’s losses.  And they are just slow.  By the time you either get your rate or get denied, you’ve probably pushed back your closing date.

Second, the big banks often don’t have the best rates.  Again, they have strict underwriting criteria.  All mortgage rates are based off of LIBOR (London Interbank Offered Rate) which is set interest rate that banks pay.  So they make whatever they charge you above this rate, less their fixed costs.  While there are some economies of scales, on a per-loan basis, larger banks typically have more costs than smaller banks. So they have to compensate for this.  Plus, the loan originators just lack the flexibility to come don on rates and decrease the overall margin – whereas small banks and non-banks have some flexibility here.

But neither of those are the real reasons that you don’t want to rely solely on your primary bank for a mortgage.

The real reason?

Banks give deals to NEW customers.

Yeah, by definition, your bank might not be in a position to give you the best mortgage rate because….well….they are your bank!  It’s sort of like buying a phone plan.  When you sign up for the phone plan, you get all sorts of deals.  But when you’ve been a customer and renew, those deals are gone.  They are for new customers only.  Same thing with mortgages.

Other banks – both big and small – want your checking and savings accounts.  They will quote you a mortgage rate.  But then most will say, “And if you move your checking & savings accounts to us, we’ll be able to reduce that rate X% points.”  This is the one area where even big banks have flexibility to move rates and reduce their margins.  It’s all a negotiation, and your checking & savings account is essentially a bargaining chip.  Through no fault of its own, your current bank is not going to be as hungry for your business because they already have it.

So don’t let your bargaining chip go to waste.  As you can see from the stats, many people are going to their local bank and likely not even comparing it to another lender or broker.  Be open to moving your accounts – at least in conversation – and compare the rates.  If the other bank can’t make you a deal, no harm done.